Rolling Stone Reports NSS (Matt Taibbi)

[sandi66]

Rolling Stone Reports that Naked Short Selling Killed Bear Stearns and Lehman Brothers

Posted on 01 October 2009 by Mark Mitchell

Tags: bear stearns, Lehman Brothers, Matt Taibbi, naked short selling, Rolling Stone, SEC

Matt Taibbi has published a story in Rolling Stone magazine that nobody should miss. It’s not yet available on-line, so you’ll have to pick it up at the newsstands, but here’s a quick summary.

Taibbi writes:

“On Tuesday, March 11th, 2008, somebody – nobody knows who – made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half of their value in nine days or less. It was madness – “like buying 1.7 million lottery tickets,” according to one financial analyst.”

Bear’s stock would have to drop by more than half in a matter of days for the mystery figure to make a profit. And that is what happened.

As Taibbi explains, “the very next day, March 12, Bear went into a free fall…Whoever bought those options on March 11th woke up on the morning of March 17th having made 159 times his money, or roughly $270 million. This trader was either the luckiest guy in the world, the smartest son of a pregnant dog ever or…Or what?”

Taibbi speculates (as has Deep Capture) that these options might have been purchased by somebody who was abusing the options market maker exemption to engage in illegal naked short selling. And Taibbi goes beyond speculation to state, as an obvious fact, that illegal naked short selling helped bring Bear Stearns to its knees.

Presumably operating under that assumption, the SEC issued more than 50 subpoenas to Wall Street firms in the wake of Bear’s collapse, but “it has yet to indentify the mysterious trader who somehow seemed to know in advance that one of the five largest investment banks in America was going to completely tank in matter of days.”

Taibbi continues: “The SEC’s halfhearted oversight didn’t go unnoticed by the market. Six months after Bear was eaten by predators, virtually the same scenario repeated itself in the case of Lehman Brothers – another top-five investment bank that in September 2008 was vaporized in an obvious case of [naked short sellers engaging in] market manipulation. From there, the financial crisis was on, and the global economy went into full-blow crater mode.”

Taibbi notes that there were many other factors that made the economy weak. But he says that naked short selling is what pushed Bear and Lehman over the edge. If it weren’t for naked short selling – a massive “counterfeiting scheme,” in Taibbi’s words — those banks would likely have survived, and we might have avoided an all-out financial catastrophe.

This cannot be stressed enough. Criminals deliberately destroyed two of America’s biggest investment banks, precipitating the greatest financial cataclysm since the Great Depression. And the government has done absolutely nothing to bring those criminals to justice. In fact, as Taibbi makes clear in his story and on his blog, the most likely culprits are feted by top government officials in closed door meetings.

I’d call this the biggest financial and political scandal in the history of this country.

Certainly, it is, as Taibbi writes, “one of the most blatant cases of stock manipulation in Wall Street history.” Certainly, it is, as Taibbi writes, “the two biggest murders in Wall Street history.” And, certainly, it is odd that this very big story has appeared in Rolling Stone, but has yet to be covered by a single mainstream news publication.

The Wall Street Journal, The New York Times, Fortune, BusinessWeek – they have all known about naked short selling since Deep Capture reporter Patrick Byrne began hollering about it in 2005. But none of them write about it. Instead, we find a competent financial journalist, and the only major story about one the greatest financial crimes of all time, published in a slightly alternative magazine about music.

I worry for the Republic.

www.deepcapture.com/rolling-stone-reports-that-naked-short-selling-killed-bear-stearns-and-lehman-brothers/

ty dakawa

[sandi66]

Matt Taibbi from Rolling Stones Magazine -- being interviewed on MSNBC....well worth the four minutes of your day.

www.youtube.com/watch?v=OqZUbe9KIMs

Matt Taibbi from Rolling Stones Magazine -- describing what Naked Short Selling is... how it's done.

www.rollingstone.com/videos/player/30347227

ty AlanC

[sandi66]

53 Responses to “Rolling Stone Reports that Naked Short Selling Killed Bear Stearns and Lehman Brothers”
Jim Hall says:
October 1, 2009 at 2:14 pm
The Israeli/Russian Mafia, through, GS and others has won.

Can we win our country back?

Reply
Jim Hall says:
October 1, 2009 at 2:29 pm
From Bloomberg:

Airport Runway

On Sept. 17, two days after Lehman Brothers filed for Chapter 11 bankruptcy, the number of failed trades climbed to 49.7 million, 23 percent of overall volume in the stock.

The next day, the SEC announced its ban on shorting financial companies in 2008. The number of protected stocks ultimately grew to about 1,000. On Sept. 19, the commission announced “a sweeping expansion” of its investigation into possible market manipulation.

The ban, which lasted through Oct. 17, didn’t eliminate shorting, according to data from the SEC, the NYSE Arca exchange and Bloomberg. Throughout the period, short sales averaged 24.7 percent of the overall trading in Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs Group Inc. on NYSE Arca. In 2008, short sales averaged 37.5 percent of the overall trading on the exchange in the three companies.

To date, the commission hasn’t announced any findings of its investigation.

Pollack, the former SEC regulator, wonders why.

“This isn’t a trail of breadcrumbs; this audit trail is lit up like an airport runway,” he said. “You can see it a mile off. Subpoena e-mails. Find out who spread false rumors and also shorted the stock and you’ve got your manipulators.”

To contact the reporter on this story: Gary Matsumoto in New York at [e-mail].

www.bloomberg.com/apps/news?pid=20601109&sid=aB1jlqmFOTCA

Reply
calltoaccount says:
October 3, 2009 at 12:39 pm
unfortunately, you won’t find gary matsumoto at bloomberg these days because in his words “No one at Bloomberg News is interested in naked short selling.”
below is gm’s original story followed by further commentary on why he’s no longer at bloomberg.

*************************************

Naked Short Sales Hint Fraud in Bringing Down Lehman (Update1)

By Gary Matsumoto
March 19 (Bloomberg) — The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.
As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.
The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.
“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.’”
While the commission’s Enforcement Complaint Center received about 5,000 complaints about naked short-selling from January 2007 to June 2008, none led to enforcement actions, according to a report filed yesterday by David Kotz, the agency’s inspector general.
The way the SEC processes complaints hinders its ability to respond, the report said.
Twice last year, hundreds of thousands of failed trades coincided with widespread rumors about Lehman Brothers. Speculation that the company was being acquired at a discount and later that it was losing two trading partners both proved untrue.
After the 158-year-old investment bank collapsed in bankruptcy on Sept. 15, listing $613 billion in debt, former Chief Executive Officer Richard Fuld told a congressional panel on Oct. 6 that naked short sellers had midwifed his firm’s demise.
Gasoline on Fire
Members of the House Committee on Government Oversight and Reform weren’t buying that explanation.
“If you haven’t discovered your role, you’re the villain today,” U.S. Representative John Mica, a Florida Republican, told Fuld.
Yet the trading pattern that emerges from 2008 SEC data shows naked shorts contributed to the fall of both Lehman Brothers and Bear Stearns Cos., which was acquired by JPMorgan Chase & Co. in May.
“Abusive short selling amounts to gasoline on the fire for distressed stocks and distressed markets,” said U.S. Senator Ted Kaufman, a Delaware Democrat and one of the sponsors of a bill that would make the SEC restore the uptick rule. The regulation required traders to wait for a price increase in the stock they wanted to bet against; it prevented so-called bear raids, in which successive short sales forced prices down.
Driving Down Prices
Reinstating the rule would end the pattern of fails-to- deliver revealed in the SEC data, Kaufman said.
“These stories are deeply disturbing and make a compelling case that the SEC must act now to end abusive short selling — which is exactly what our bill, if enacted, would do,” the senator said in an e-mailed statement.
Short sellers arrange to borrow shares, then dispose of them in anticipation that they will fall. They later buy shares to replace those they borrowed, profiting if the price has dropped. Naked short sellers don’t borrow before trading — a practice that becomes evident once the stock isn’t delivered. Such trades can generate unlimited sell orders, overwhelming buyers and driving down prices, said Susanne Trimbath, a trade- settlement expert and president of STP Advisory Services, an Omaha, Nebraska-based consulting firm.
The SEC last year started a probe into what it called “possible market manipulation” and banned short sales in financial stocks as the number of fails-to-deliver climbed.
‘Unsubstantiated Rumors’
The daily average value of fails-to-deliver surged to $7.4 billion in 2007 from $838.5 million in 1995, according to a study by Trimbath, who examined data from the annual reports of the National Securities Clearing Corp., a subsidiary of the Depository Trust & Clearing Corp.
Trade failures rose for Bear Stearns as well last year. They peaked at 1.2 million shares on March 17, the day after JPMorgan announced it would buy the investment bank for $2 a share. That was more than triple the prior-year peak of 364,171 on Sept. 25.
Fuld said naked short selling — coupled with “unsubstantiated rumors” — played a role in the demise of both his bank and Bear Stearns.
“The naked shorts and rumor mongers succeeded in bringing down Bear Stearns,” Fuld said in prepared testimony to Congress in October. “And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers.”
Devaluing Stock
Failed trades correlate with drops in share value — enough to account for 30 to 70 percent of the declines in Bear Stearns, Lehman and other stocks last year, Trimbath said.
While the correlation doesn’t prove that naked shorting caused the lower prices, it’s “a good first indicator of a statistical relationship between two variables,” she said.
Failing to deliver is like “issuing new stock in a company without its permission,” Trimbath said. “You increase the number of shares circulating in the market, and that devalues a stock. The same thing happens to a currency when a government prints more of it.”
Trimbath attributes the almost ninefold growth in the value of failed trades from 1995 to 2007 to a rise in naked short sales.
“You can’t have millions of shares fail to deliver and say, ‘Oops, my dog ate my certificates,’” she said.
Explanation Required
On its Web site, the Federal Reserve Bank of New York lists several reasons for fails-to-deliver in securities trading besides naked shorting. They include misunderstandings between traders over details of transactions; computer glitches; and chain reactions, in which one failure to settle prevents delivery in a second trade.
Failed trades in stocks that were easy to borrow, such as Lehman Brothers, constitute a “red flag,” said Richard H. Baker, the president and CEO of the Washington-based Managed Funds Association, the hedge fund industry’s biggest lobbying group.
“Suffice it to say that in a readily available stock that is traded frequently, there has to be an explanation to the appropriate regulator as to the circumstances surrounding the fail-to-deliver,” said Baker, who served in the U.S. House of Representatives as a Republican from Louisiana from 1986 to February 2008.
“If it’s a pattern and a practice, there are laws and regulations to deal with it,” he said.
Fines and Penalties
Lehman Brothers had 687.5 million shares in its float, the amount available for public trading. In float size, the investment bank ranked 131 out of 6,873 public companies — or in the top 1.9 percent, according to data compiled by Bloomberg.
While naked short sales resulting from errors aren’t illegal, using them to boost profits or manipulate share prices breaks exchange and SEC rules and violators are subject to penalties. If investigators determine that traders engaged in the practice to try to influence markets, the Department of Justice can file criminal charges.
Market makers, who serve as go-betweens for buyers and sellers, are allowed to short stock without borrowing it first to maintain a constant flow of trading.
Since July 2006, the regulatory arm of the New York Stock Exchange has fined at least four exchange members for naked shorting and violating other securities regulations. J.P. Morgan Securities Inc. paid the highest penalty, $400,000, as part of an agreement in which the firm neither admitted nor denied guilt, according to NYSE Regulation Inc.
Enforcement ‘Reluctant’
In July 2007, the former American Stock Exchange, now NYSE Alternext, fined members Scott and Brian Arenstein and their companies $3.6 million and $1.2 million, respectively, for naked short selling. Amex ordered them to disgorge a combined $3.2 million in trading profits and suspended both from the exchange for five years. The brothers agreed to the fines and the suspension without admitting or denying liability, according a release from the exchange.
Of about 5,000 e-mailed tips related to naked short-selling received by the SEC from January 2007 to June 2008, 123 were forwarded for further investigation, according to the report released yesterday by Kotz, the agency’s internal watchdog. None led to enforcement actions, the report said.
Kotz, the commission’s inspector general, said the enforcement division “is reluctant to expend additional resources to investigate” complaints. He recommended in his report yesterday that the division step up analysis of tips, designating an office or person to provide oversight of complaints.
Schapiro’s Plans
“Our audit disclosed that despite the tremendous amount of attention the practice of naked short selling has generated in recent years, Enforcement has brought very few enforcement actions based on conduct involving abusive or manipulative naked short selling,” the report said.
The enforcement division, in a response included in the report, said “a large number of the complaints provide no support for the allegations” and concurred with only one of the inspector general’s 11 recommendations.
SEC Chairman Mary Schapiro, who took office in January, has vowed to reinvigorate the enforcement unit after it drew fire from lawmakers and investors for failing to follow up on tips that New York money manager Bernard Madoff’s business was a Ponzi scheme. She has “initiated a process that will help us more effectively identify valuable leads for potential enforcement action,” John Nester, a commission spokesman, said in response to the Kotz report.
Last September, the agency instituted the temporary ban on short sales of financial stock. It also has announced an investigation into “possible market manipulation in the securities of certain financial institutions.”
No Effective Action
Christopher Cox, who was SEC chairman last year; Erik Sirri, the commission’s director for market regulation; and James Brigagliano, its deputy director for trading and markets, didn’t respond to requests for interviews. John Heine, a spokesman, said the commission declined to comment for this story.
“It has always puzzled me that the SEC didn’t take effective action to eliminate naked shorting and the fails-to- deliver associated with it,” Pitt, who chaired the commission from August 2001 to February 2003, said in an e-mail. The agency began collecting data on failed trades that exceed 10,000 shares a day in 2004.
“All the SEC need do is state that at the time of the short sale, the short seller must have (and must maintain through settlement) a legally enforceable right to deliver the stock at settlement,” Pitt wrote. He is now the CEO of Kalorama Partners LLC, a Washington-based consulting firm. In August, he and some partners started RegSHO.com, a Web-based service that locates stock to help sellers comply with short-selling rules.
Postponed ‘Indefinitely’
Pitt began his legal career as an SEC staff attorney in 1968, and eventually became the commission’s general counsel. In 1978, he joined Fried Frank Harris Shriver & Jacobson LLP, where as a senior corporate partner he represented such clients as Bear Stearns and the New York Stock Exchange. President George W. Bush appointed him SEC chairman in 2001.
The flip side of an uncompleted transaction resulting from undelivered stock is called a “fail-to-receive.” SEC regulations state that brokers who haven’t received stock 13 days after purchase can execute a so-called buy-in. The broker on the selling side of the transaction must buy an equivalent number of shares and deliver them on behalf of the customer who didn’t.
A 1986 study done by Irving Pollack, the SEC’s first director of enforcement in the 1970s, found the buy-in rules ineffective with regard to Nasdaq securities. The rules permit brokers to postpone deliveries “indefinitely,” the study found.
The effect on the market can be extreme, according to Cox, who left office on Jan. 20. He warned about it in a July article posted on the commission’s Web site.
Turbocharged Distortion
When coupled with the propagation of rumors about the targeted company, selling shares without borrowing “can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions,” he said in the article.
“‘Naked’ short selling can turbocharge these ‘distort-and- short’ schemes,” Cox wrote.
“When traders spread false rumors and then take advantage of those rumors by short selling, there’s no question that it’s fraud,” Pollack said in an interview. “It doesn’t matter whether the short sales are legal.”
On at least two occasions in 2008, fails-to-deliver for Lehman Brothers shares spiked just before speculation about the bank began circulating among traders, according to SEC data that Bloomberg analyzed.
On June 30, someone started a rumor that Barclays Plc was ready to buy Lehman for 25 percent less than the day’s share price. The purchase didn’t materialize.
‘Green Cheese’
On the previous trading day, June 27, the number of shares sold without delivery jumped to 705,103 from 30,690 on June 26, a 23-fold increase. The day of the rumor, the amount reached 814,870 — more than four times the daily average for 2008 to that point. The stock slumped 11 percent and, by the close of trading, was down 70 percent for the calendar year.
“This rumor ranks up there with the moon is made of green cheese in terms of its validity,” Richard Bove, who was then a Ladenburg Thalmann & Co. analyst, said in a July 1 report.
Bove, now vice president and equity research analyst with Rochdale Securities in Lutz, Florida, said in an interview this month that the speculation reflected “an unrealistic view of Lehman’s portfolio value.” The company’s assets had value, he said.
‘Obscene’ Leverage
During the first six days following the Barclays hearsay, the level of failed trades averaged 1.4 million. Then, on July 10, came rumors that SAC Capital Advisors LLC, a Stamford, Connecticut-based hedge fund, and Pacific Investment Management Co. of Newport Beach, California, had stopped trading with Lehman Brothers.
Pimco and SAC denied the speculation. The bank’s share price dropped 27 percent over July 10-11.
Banks and insurers wrote down $969.3 billion last year — and that gave legitimate traders plenty of reason to short their stocks, said William Fleckenstein, founder and president of Seattle-based Fleckenstein Capital, a short-only hedge fund. He closed the fund in December, saying he would open a new one that would buy equities too.
“Financial stocks imploded because of the drunkenness with which executives buying questionable securities levered-up in obscene fashion,” said Fleckenstein, who said his firm has always borrowed stock before selling it short. “Short sellers didn’t do this. The banks were reckless and they held bad assets. That’s the story.”
‘Market Distress’
On May 21, David Einhorn, a hedge fund manager and chairman of New York-based Greenlight Capital Inc., announced he was shorting stock in Lehman Brothers and said he had “good reason to question the bank’s fair value calculations” for its mortgage securities and other rarely traded assets.
Einhorn declined to comment for this story. Monica Everett, a spokeswoman who works for the Abernathy Macgregor Group, said Greenlight properly borrows shares before shorting them.
Even when they’re legitimate, short sales can depress share values in times of market crisis — in effect turning the traders’ negative bets into self-fulfilling prophecies, says Pollack, the former SEC enforcement chief who is now a securities litigator with Fulbright & Jaworski in Washington.
The SEC has been concerned about the issue since at least 1963, when Pollack and others at the commission wrote a study for Congress that recommended the “temporary banning of short selling, in all stocks or in a particular stock” during “times of general market distress.”
Airport Runway
On Sept. 17, two days after Lehman Brothers filed for Chapter 11 bankruptcy, the number of failed trades climbed to 49.7 million, 23 percent of overall volume in the stock.
The next day, the SEC announced its ban on shorting financial companies in 2008. The number of protected stocks ultimately grew to about 1,000. On Sept. 19, the commission announced “a sweeping expansion” of its investigation into possible market manipulation.
The ban, which lasted through Oct. 17, didn’t eliminate shorting, according to data from the SEC, the NYSE Arca exchange and Bloomberg. Throughout the period, short sales averaged 24.7 percent of the overall trading in Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs Group Inc. on NYSE Arca. In 2008, short sales averaged 37.5 percent of the overall trading on the exchange in the three companies.
To date, the commission hasn’t announced any findings of its investigation.
Pollack, the former SEC regulator, wonders why.
“This isn’t a trail of breadcrumbs; this audit trail is lit up like an airport runway,” he said. “You can see it a mile off. Subpoena e-mails. Find out who spread false rumors and also shorted the stock and you’ve got your manipulators.”
To contact the reporter on this story: Gary Matsumoto in New York at [e-mail].
Last Updated: March 19, 2009 03:30 EDT

News Media Silenced Regarding Stock Shock-The Movie
June 9th, 2009

By Brandon Matthews

On the eve of the release of the most anticipated documentary of the year, “Stock Shock-The Movie,” it has come to the attention of Satwaves that the financial news media is being silenced regarding its content and release. While I was in New York City several months ago being interviewed on film, I learned that Bloomberg had taken an interest in telling the story of Stock Shock. The documentary itself tells the tale of naked short selling and media bias as it relates to the story of Sirius XM Radio (SIRI).

Bloomberg’s award winning journalist Gary Matsumoto has written extensively in regards to naked short selling. As recently as last March, Mr. Matsumoto had written an article on the subject stating that “The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.” Naked short selling opponents picked up this article as ammunition to further their cause.

Director Sandra Mohr had been interviewed for both a taped piece as well as a written piece while in N.Y., both of which were to be released prior to Stock Shock’s June 10, 2009 debut. Satwaves has learned that neither of these pieces will ever be seen by a single American investor.

In what can only be described as apparent censorship by Bloomberg, Satwaves has acquired a copy of an email from Mr. Matsumoto regarding Bloomberg’s newly adopted position on what qualifies as market related news.

Mr. Matsumoto writes:

“I’m sorry to say that I will not be covering anything related to naked short selling for the foreseeable future. To the best of my knowledge, No one at Bloomberg News is interested in naked short selling. That’s all I have to say on the matter”.
The tone of this response would seem to indicate remorse on the part of Mr. Matsumoto, and leaves us only to speculate on his seeming regret to no longer cover the topic of naked short selling. Has Bloomberg, a trusted source of supposed unbiased financial news put up roadblocks to the truth? If so, how can they or any other financial news media giant be trusted to deliver the news to mainstream America. Has the freedom of the American Press finally been silenced after more than 200 years? If so, can the end of the American dream be far behind?
Position: Long SIRI

Reply
WizardsOfOz says:
October 3, 2009 at 11:40 pm
Complementary…
On September 21, 2008, Goldman Sachs received Federal Reserve approval to transition from an investment bank to a bank holding company.

On September 22, 2008, the last two major investment banks in the United States, Morgan Stanley and Goldman Sachs, both confirmed that they would become traditional bank holding companies, bringing an end to the era of investment banking on Wall Street.

Goldman Sachs got help from Berkshire Hathaway, which bought $5 billion in Goldman’s preferred stock, and also got warrants to buy another $5 billion in Goldman’s common stock. Goldman also received $10 billion of capital from the U.S. government in October 2008, under the Troubled Asset Relief Program.

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clb says:
October 1, 2009 at 2:45 pm
check this bullshit out;

meganmcardle.theatlantic.com/archives/2009/09/bear_raiders.php

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Sarge says:
October 1, 2009 at 4:20 pm
Typical trash from her, she seems to make a point out of trying to trash anything that Matt Taibbi writes. Check this other line of drivel she wrote:

meganmcardle.theatlantic.com/archives/2009/07/matt_taibbi_gets_his_sarah_pal.php

I wish the rest of these so called “reporters” would take a cue from the Judd Bagleys, Gary Matsumotos, and Matt Taibbis of the world and talk to us like adults. Would it surprise someone like Megan McArdle to find out that even an old dumb soldier like me can make it all the way through one of her so called “articles” without having to wipe the drool off my shirt or put on a helmet?

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Anonymous says:
October 1, 2009 at 2:46 pm
All the misinformation could backfire on GS because mainstreet hates them.

www.huffingtonpost.com/2009/09/30/irolling-stoneis-matt-tai_n_304085.html

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Anonymous says:
October 1, 2009 at 4:07 pm
trueslant.com/matttaibbi/2009/10/01/on-goldmans-reaction-to-the-lobbying-post/

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Paul says:
October 1, 2009 at 7:43 pm
It’s good that the anti-NSS movement is getting more publicity.

But more importantly…

You actually put the Lenon and Yoko cover as the thumbnail photo. Ha ha ha!

Reply
pashka says:
October 1, 2009 at 9:54 pm
I wrote this letter to the editors of NY Times and posted as commentary in their DealBook “article” about the debate over NSS:

The illegal behavior of hedge funds and Wall Street firms that allow share price manipulation by naked shorting stocka is reinforced by a mass media white out on the subject. If you consider the extent of fraud, corruption, and regulatory incompetence surrounding naked short selling (which has caused more damage than Madoff), every major news outlet should be questioning our current regulatory framework. NY Times on the other hand, only 4 articles between Jan 2007 – Jan 2008 discussing this problem or the extent of abuse.

I appreciate Floyd Norris’ attempt to write on this topic in his article titled “Goodbye Naked Shorts” (which implies that the problem has been resolved). Unfortunately , in the article Mr. Norris completely ignored evidence that regulatory loopholes (RegSHO list) and lax SEC enforcement contributed to bringing our financial markets to the brink of collapse ( antisocialmedia.net/short-selling-hedge-funds-and-the-global-economic-meltdown/ ). How can he imply that the NS problem is gone if we don’t know the scale of the broker-level netting, pre-netting, Stock Borrow Program, ex-clearing and off-shore failures?!? The article seems intent to pacify the public into thinking that we are safe from these malpractices when we don’t even the extent of their abuse.

I have been a loyal reader of your newspaper and cite it to my friends and family as my number one source of information, but if NY Times continues to ignore this massive problem and doesn’t provide more thorough reporting on this subject I will have to switch to another source of daily information. One that doesn’t continuously ignore collusion, manipulation, and theft within our financial industry after the Great Recession brought this country to it’s knees.

Contact your Congressmen to demand NSS laws are properly enforced or changed so these crooks aren’t able undermine the public’s confidence in our markets –
www.congress.org/

And sign this easy and professional petition that will get sent to Congress within a month – www.petitiononline.com/mrktrfrm/petition.html

Reply
calltoaccount says:
October 3, 2009 at 12:30 pm
flim flam floyd, his co-conspirator hedge fund hack flack no-accountability nocera and the ny times in general have for years scrupulously avoided reporting anything of consequence on the existence and perniciousness of naked short selling– at least ever since 1998 when Gretchen Morgenson noted that wall st considered retail investors (including via mutual funds) “the dumb money,” there to absorb all the risk to wall st’s enormous benefit. the nyt is part of the problem and doubly to blame because they have betrayed their readers by consistently publishing misleading half truths and outright lies re the mass of institutionalized corruption on wall st.

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theTurtle says:
October 2, 2009 at 1:27 am
I have not read Matt’s article in Rolling Stone.

1. If I recall correctly, those put options and their strike prices did not exist prior to the trade. That is to say, somebody made a special request for them. Can anybody verify if this is indeed true?

2. There is a counter-party to those options. Somebody is always on the other side of the trade. Is it not a bit odd that nobody seems to have chirped up with a loss? Almost as if they did not lose at all? Awe shucks, maybe they were too embarrassed to scream bloody murder. Invert, always invert.

I always liked Taibbi. He’s what’s known as “from the shoulder.”

theTurtle

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Jim Hall says:
October 2, 2009 at 5:35 am
WAMU taken down also:

www.avaresearch.com/files/20090930175434.pdf

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Anonymous says:
October 2, 2009 at 8:27 am
seekingalpha.com/article/164404-new-taibbi-feud-with-goldman

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Jim Hall says:
October 2, 2009 at 8:28 am
Goldman in the Government exposed:

trueslant.com/matttaibbi/2009/07/16/max-keiser-goldman-sachs-are-scum/

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Dr. Jim DeCosta says:
October 2, 2009 at 8:52 am
the turtle,

The seller of those put options no doubt “hedged” his position by naked short selling a truckload of shares. He probably did just fine. It’s the buyers of those nonexistent shares that lost all of their money. The same holds true for the buyers of the nonexistent shares of Lehman Brothers sold as they were going under. Recall that even though the numbers of failures to deliver of Lehman Brothers towards the end went up 57-FOLD from their previous all time high the SEC, the SROs and the financial media still assert that naked short selling had no role in their demise.

The question that begs to be asked is WHY would these parties feel it necessary to proffer such an absurd utterance like NSS didn’t play a causative role. The answer is that they had to in order to cover up the existence of this entire abusive naked short selling “industry within an industry” and the fact that the share structure of many U.S. corporations are CURRENTLY being poisoned with inordinate numbers of delivery failures that are currently manipulating share prices downwards.

Another question begging to be asked is why would these crooks attack Lehman when the systemic risk repercussions were obvious on a global scale and they knew their actions would eventually be put under a microscope. The answer to that is once again that the crooks know that the SEC and the SROs can be counted on to sweep their actions under the rug in order to continue to cover up the existence of this “industry within an industry”.

The SEC and the SROs have to do this lest U.S. investors learn that many of the investments they made in especially development stage corporations over the years never did have a chance for success simply because they were previously targeted for destruction. Our court system couldn’t possibly handle the number of cases that would ensue should the truth be revealed. The Bear Stearns naked short selling had to be swept under the rug. This gave the tacit thumbs up to attack Lehman since nobody got busted for the Bear Stearns debacle. Down goes Lehman with no apparent repercussions for those crooks involved. Now that we have no “uptick rule” whose next? The systemic risk repercussions for all of us does not even register with those with the levels of unbridled greed that we see on Wall Street.

What did it finally take to get the attention of the SEC? It took the near meltdown of our entire financial system and even that has not led to any emergent reinstatement of the uptick rule or any noticeable prosecution of those responsible. What is the SEC doing now as Rome burns? They’re hosting yet more “roundtables” stacked to the hilt with the financial beneficiaries of these thefts and yet more “comment periods”. The concept is called “death by delay” because those U.S. corporations barely keeping their heads above water in this wonderful sea of “liquidity” these crooks provide need to be done away with to circumvent the need for the crooks to finally buy and deliver that which they previously sold and agreed to deliver by T+3. Until the FTDs residing in “ex-clearing arrangements” are removed from the share structures of these corporations refusing to go bnkrupt the SEC has to sweep all of this activity under the rug no matter what the systemic risk repercussions are for all of us. This is not rocket science! These crimes will not be addressed until “the ultimate paradox” and the role of the “security entitlement” are appreciated.

THE ULTIMATE PARADOX: All readily sellable share price depressing “security entitlements” which are induced to be “issued” with each and every failure to deliver (FTD) and each and every NSCC SBP “borrow” that occurs on Wall Street lead to the crediting of a readily sellable share price depressing “long position” to the account of the purchaser “entitling” the account holder to resell that which he purchased even if that which was sold to him never got delivered and even if that sold to him never existed in the first place.

Reply
Jim Hall says:
October 2, 2009 at 9:24 am
Rather makes “The Matrix” read like a child’s bedtime story, no?

Reply
Anonymous says:
October 3, 2009 at 7:28 am
People don’t get widely exposed to information like this because there would be a collective conscious against what happening take place in this country, and the games would end quickly. As long as the people are ‘lied’ to by the lack of reporting, we are all in big trouble.

Reply
sean says:
October 2, 2009 at 10:45 am
Until today after reading this article I never kneew that the SEC oversaw FINRA.

The organization is developing a reform plan based on the recommendations to be presented to its board in December, FINRA Chairman and CEO Richard Ketchum said in a letter Thursday to the SEC, which oversees FINRA.

FINRA already has taken steps to strengthen its regulatory program, including improving its routine exam programs, Ketchum said.

The special committee also recommended creating a fraud detection unit within FINRA to ensure that exams involving significant allegations get high priority — something the organization’s management plans to establish.

FINRA Missed Madoff – Stanford Ponzi Schemes
abcnews.go.com/Business/wireStory?id=8733124

Reply
Anonymous says:
October 2, 2009 at 11:37 am
newledger.com/2009/10/matt-taibbi-and-john-carney-on-naked-short-selling/

Reply
Lenofus says:
October 2, 2009 at 12:25 pm
So this guy comes out 18 months after the fact, and arrives on a mule walking on palm fronds, or however that went down. Great. Good for him.

Why didn’t people listen while we were hollering during the act? Better late than never? Hardly. Everything is gone. Check the job numbers today. They represent real people, not that the put buyer cares . But I do.

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CTC says:
October 3, 2009 at 9:29 pm
Nothing changes…only the degree of transgression.

“The few who understand the system, will either be so interested in its profits, or so dependent on its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantages…will bear its burden without complaint, and perhaps without suspecting that the system is inimical to their best interests.”
— Rothschild Brothers of London
June 25, 1863 communiqué to associates in New York

Reply
Anonymous says:
October 2, 2009 at 2:20 pm
rense.com/general87/topc.htm

(1) US Congress Sells Out to Wall Street

Americans get the best democracy money can money, coming more than ever today from Wall Street. “Since 2001, eight of the most troubled firms have donated $64.2 million to congressional candidates, presidential candidates and the Republican and Democratic parties.” Is it surprising that they own them? As senators, Barack Obama and John McCain got “a combined total of $3.1 million.”

Influential House and Senate finance and banking committee members got $5.2 million from bailout recipients like Goldman Sachs, Citibank, AIG, Fannie Mae, Freddie Mac, and others. In the last election cycle, Obama received at least $4.3 million from the same ones, investments that yielded big returns.

From 1998 – 2007, financial and banking companies “spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists.” In 1999, Glass-Steagall was repealed, the landmark 1933 law that curbed speculation and separated commercial from investment banks and insurance companies. In January 2000, the Commodity Futures Modernization Act legitimized swap agreements and other hybrid instruments, at the core of today’s problems by preventing regulatory oversight of derivatives and leveraging, thus letting Wall Street legally pillage and speculate, so they did.

The result was a financial coup d’etat “cement(ing) the gradual takeover of the government by a small class of connected insiders” who choose candidates, control elections, weaken financial regulations, and run the country for their own self-interest. As a result, Washington today is a wholly owned subsidiary of the Wall Street financial giants. What they want, they get, no questions asked.

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FrankHope says:
October 2, 2009 at 2:21 pm
We all know that Deep Capture has been the leader in exposing the naked short selling criminal racket. I wrote an article about the use of naked short selling and how it was used to take down Bear Stearns and Lehman Brothers titled “The Phantoms of the Stock Market”. Unlike Taibbi, I give full credit to Deep Capture for your investigative work in this area. In fact I wouldn’t be surprised if Taibbi used my article as a reference. I make my case in a article titled “Matt Taibbi and I”.

It’s clear to me that the DTCC has the information that would finger whoever was illegally profiting from the demise of Bear Stearns and Lehman Brothers, but that information has been kept secret.

I have another article I wrote titled, “How Goldman Sachs whacked Bear Stearns”. There’s plenty of evidence that GS and Paulson took out Bear Stearns. Fortune magazine reported about a memo from Goldman Sachs which was the death knell for BS.

“on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals.”
[...]
“Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them.”

The reason the relevant information about naked short selling is not being made public is very clear. It’s because it would lead to Goldman executives going to jail – including Paulson – if all the information were revealed. This is the financial crime of the century and its being swept under the rug.

Kudos to Taibbi for shining a spotlight on this issue, but he should also give due credit to sites like Deep Capture that paved the way for him.

Reply
FrankHope says:
October 2, 2009 at 3:51 pm
I know it’s retarded to reply to myself, but…

I just noticed that March 11th, the day that Taibbi reports a $1.7 million bet that Bear Stearns would fail, is the same day that Goldman Sachs sent out the memo I highlighted above stating that they would “no longer step in for them on Bear derivatives deals”.

All fingers point at Goldman Sachs as a guilty party in this scam.

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Judd Bagley says:
October 2, 2009 at 8:57 pm
Matt addresses this in the full story. It’s an outstanding point and one that I’d missed.

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FrankHope says:
October 3, 2009 at 3:33 am
Thanks for your reply. I am just now getting up to speed on the story you have uncovered about Gary Weiss. This puts DTCC right in the middle of a smear campaign against anyone that dares to question the practice of naked short selling.

I hope that you get a chance to read my articles “Phantoms of the Stock Market” and “How Goldman Sachs whacked Bear Stearns”. Probably 99% of this information is old news to you, but maybe you’ll find something useful in the stories or the links I’ve provided in the articles.

One interesting thing that I found that you may not be aware of is that Jill M. Considine went from being chairman of the DTC to a trustee of AIG after the government bailout. Presumably a trustee of AIG after the virtual government takeover would be there to protect the interests of the taxpayer, but in the case of Considine it looks more likely that she is there to cover up any skeletons in the closet.

I also have a link to a Bloomberg article strongly suggesting that naked short selling contributed to the fall of Lehman Brothers. They quote Harvey Pitt, a former SEC chairman, as saying that naked short selling is equivalent to fraud.

Finally I write in my article about how DTCC is also involved in derivatives and specifically CDS (Credit Default Swaps) which are widely regarded as having had a major role in the 2008 financial crisis. The press keeps repeating the mantra that no one knows the size of the CDS market, but it seems to me that there is one organization that does have this information – DTCC.

I’m hopeful that Matt Taibbi’s article on the subject of naked shorts will catapult this story into the mainstream. Many thanks to everyone at Deep Capture who have tirelessly pursued the exposure of this Wall St. scam.

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Anonymous says:
October 2, 2009 at 3:04 pm
www.forbes.com/2009/10/02/singer-commentary-roundtable-intelligent-investing-schapiro.html

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ryanonthebeach says:
October 2, 2009 at 4:06 pm
total crap… you could see this fall from a mile away. These guys where clearly bankrupt. Gambling at 35X leverage… is what destroyed the “banks”

tvfreezone says:
October 2, 2009 at 4:42 pm
Rolling Stone did a pretty good job of explaining the short sell procedures that had been totally deregulated by our beloved Congress, the members of which do not know what a a short sell is, and how short selling can create havoc in the market place. Did you know the market currently is operating the way it did in 1907, when a giant crash occurred due to short selling by guys like Jesse Livermore? Did you know that deregulating the stock market is much more dangerous than deregulating the aviation transportation industry? Do you know that deregulating the way the federal government controls the flow of air traffic would cause numerous crashes? I have never heard even the brain dead republicans demand that the national aviation system be completeley deregulated. Why not? I thought deregulation would let the “market” run things just fine. So you see, the stock market is as dangerous and as explosive as the national aviation system when it is deregulated. Why do I know this and members of Congress do not? Because they are too busy being corrupt to care about such important matters.

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Jim Hall says:
October 3, 2009 at 5:35 am
Government subversives like Sen Shelby knew exactly what damages shortselling could inflict and were, very likely, shorting the hell out of the market themselves.

Time to audit the filthy hands of the senate.

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Matt Dubuque says:
October 2, 2009 at 5:12 pm
Matt is likely mistaken here. I’m a fellow who made an excellent living as a market maker in derivatives and am intimately familiar with market making in options.

Recall that two days before the 9/11 attacks some person bought an enormous amount of puts on airlines stocks. The perpetrator never claimed his money; he obviously had inside knowledge.

Here in the Bear Stearns case, this criminal very likely also had inside knowledge. But in all likelihood his criminality had nothing to do with naked short selling. It’s just another crook trading on inside information who never claimed his winnings.

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Judd Bagley says:
October 2, 2009 at 9:03 pm
Matt D.,
If you read Matt T’s full story, you’ll find a solid explanation of the role the options market maker exemption plays in the creation of married puts and reverse conversions, which are in turn a key component of the naked shorting process.
I’ll concede that there’s no smoking gun evidence tying one event to the other, but given the circumstances, I’d say it should be much more than enough to spark a real investigation.

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John Olagues says:
October 2, 2009 at 9:13 pm
The idea that naked short seller together with rumor mongers

brought down Bear Stearns is absurd.

Here is one piece of fact that makes it obvious.

Bear Stearns closed at 30 on Friday March 14, 2008 and opened at

below 4 on Monday March 17, 2008. Surely no one but some true

believer religious nut would hold the view that naked short

sellers made the stock go from 30 to below 4, because there were

no trades between the closing price on Friday at 30 and below 4 as

the opening price on Monday.

So that leaves us to examine the price movement on Friday March 14,

2008, when the stock went from 65 to 30. Was there massive short

sales and were these naked short sales? Remember that buying puts

are synthetic naked short sales and there was massive buying of

those. Did those put buyers influence the stock like the regular

short sales and the “naked short sales” and if so, then why are

they not identified as the cause of the drop from 65 to 30.

And if the story is true that rumor mongers who did “naked Short

sales”, caused the collapse of Bear Stearns, why has no one been

arrested. Its easy to determine who the short sellers were both

straight and naked. If there were rumor mongers, then who were they.

They caused it but we can’t tell you who they are.

The whole idea is absurd.

The truth is that the Bear Stearns collapse was set up months

before the event with the finishing touches put on it in the week

prior to March 14. All the put buying, the naked short sales and

regular short saled were done by persons trading on inside

information.

And believe me that I have traded more puts, shorted more stock

than anyone who is going to visit this site. And I had substantial

positions in Bear Stears securities during the collapse.

Claiming that the shorts caused the collapse is like saying that

insiders who bought calls and stock immediately prior to an

announced takeover caused the takeover.

“All America is an insane asylum”

Ezra Pound

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mdf says:
October 3, 2009 at 9:25 am
I completely agree. To correlate short sales with collapse is confusing symptoms with cause, like saying the reason the team lost the game was the spread was against them. It underscores the extent that value is in the eye of the beholder, and that negative perceptions, like positive ones, trigger feedback loops that reinforce perception in either direction. Those feedback loops – on the positive side – are much closer to being the root cause, as they related to real estate values. Anyone generating fees off the dotcommy rise in real estate prices would deride you as being a crazy for doubting the hypothesis that values always went up. Absolutely impossible that prices could ever rewind to where they were just three years previous – impossible! The other primary cause was insurance fraud. All the credit risks everyone was taking were “safe” becuase they were offset by credit default swaps, issued by institutions whose names alone implied creditworthiness: Bear Stearns, Lehman, AIG, etc… Those firms were all writing insurance policies without adequate reserves, collecting premiums without worrying about paying claims, and doing so in any other insurance context would qualify as fraud. Insurance is the financial instrument regulation was born for. The real crime was a regulatory climate that permitted and in fact encouraged this sort of fraud.

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pashka says:
October 3, 2009 at 2:05 pm
Ezra,
No one is trying to say that NSS was the only or main reason that Bear and Lehman collapsed. What people are mad at is that NSS was a major catalyst in affecting the timing of events and artificially depressing the price at a time of crisis by creating negative feedback loops.
Remember that Bear, Lehman, and the rest of the Wall St. firms would have gone BK if the government didn’t step in but why should the NSS dictate the choice or timing of which firm will fail?!?
By depressing the share price NSS can diminish confidence and perception of the firms future earnings which directly correspond to the share price driving it lower. It’s not difficult to comprehend supply and demand curves and how they effect the price of any product or service.

Reply
RexOzone says:
October 2, 2009 at 9:49 pm
Taibbi nails the situation in simplistic examples that even a corrupt wall street trader can decipher. Thanks, Matt for the explanation for the rest of us who wonder where the money went…wish you had had Greenspan’s job when he was being ridden by Bush. And man, I wish I could write like that.
Do you have to necessarily “eXile” yourself before you can write with crystalline exactitude, purposeful powerful profanity and horrociously fine humor?

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sean says:
October 2, 2009 at 11:16 pm
You all have to watc and listen to this…The SEC’s report card “FAIL” Suprised huh?

www.youtube.com/watch?v=gUBH5vqJdis&feature=channel

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RR says:
October 3, 2009 at 5:10 am
It was probably someone at Goldman Sachs since Tiabbi’s article on them pointed out how they profit in good times and bad. They seem to be able to manipulate the stock market with gazillions of dollars, to make a gazillion more, but for what purpose. The dollar is a fiat currency only worth what people agree to say it is worth. If all the manipulations cause the dollar to cause the world financial markets to view it as too unstable, too worthless to use as a standard & change to the Euro (another fiat currency) we’ll be truely f’d. Sometimes it seems like the Dutch Tulip Bubble of 1624.

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Jim Hall says:
October 3, 2009 at 5:45 am
Big kudos for Madame Schapiro’s adroit handling of the shortselling crisis:

www.forbes.com/2009/10/02/singer-commentary-roundtable-intelligent-investing-schapiro.html

Reply
Anonymous says:
October 3, 2009 at 7:37 am
Not sure if anyone has seen the FINRA commercial that is out there ? It mentions billions FINRA has collected for their efforts in protecting investors. How convient. Just when the IG releases his failing of the institutions who are suppose to protect the investing public (SEC-FINRA), FINRA is doing damage control by means of paid commercials. Too bad they didn’t mention How the failed FINRA controlled by Schapiro during its failure moved her to the Failed SEC for future failures.
If only there were a pattern of incompetence and corruption here !!!

Reply
Jim Hall says:
October 3, 2009 at 7:53 am
I saw that! Did MY taxpayer dollars finance that drivel?

Reply
cry baby says:
October 3, 2009 at 8:06 am
is there a lobby group for girl thingy?

www.kansascity.com/444/story/1483704.html

Sen. John Ensign of Nevada was only beginning to emerge from a self-imposed political exile over fallout from his extramarital affair with a campaign aide. Now, tawdry new details about the case are raising fresh questions whether the Ensign can be re-elected in 2012 – or even face criminal charges over his behavior.

If Ensign was looking for signs of support among Republican leaders on Capitol Hill on Friday, he didn’t get any. Senate GOP leader Mitch McConnell declined repeatedly to answer questions about Ensign or offer any support. Other Republicans, already effectively a 60-40 minority in the Senate, also met the latest developments with silence, wary of speaking out until they see evidence of wrongdoing uncovered by the Senate ethics committee or federal law enforcement.

Reply
Dr. Jim DeCosta says:
October 3, 2009 at 9:27 am
For those proffering the argument that abusive naked short selling had nothing to do with the demise of Bear Stearns and Lehman Brothers you have to remember what a failure to deliver (FTD) represents in the post-Reg SHO timeframe. The 57-fold increase in the FTDs of Lehman over their previous highest level ever attained means that each and every one of those failed deliveries involved a “locate” or “having reasonable grounds to believe that delivery would be made by T+3” that somehow MYSTERIOUSLY went bad within a confined amount of time. Were Bear Stearns and Lehman at the edge of the cliff from their own actions? Of course. But they were indeed pushed by those selling nonexistent shares, contracting to deliver that which they sold by T+3 followed by the willful refusal to deliver that which was sold.

In essence, the Wall Street securities fraudsters selling nonexistent shares to unknowing U.S. investors took out life insurance policies on Bear Stearns and Lehman Brothers and signed themselves up as beneficiaries. The mere act of refusing to deliver that which they sold thereby willfully breaching the contract they had just entered into induced the issuance of readily sellable share price depressing “security entitlements” within the share structure of these two companies. This intentional refusal to deliver that which was promised to be delivered on T+3 resulted in pushing these damaged corporations over the cliff. Proffering the argument that a 57-fold increase in FTDs above previous high-water marks was inconsequential to causation with a straight face is pretty tough to pull off. You have to remember that there were buyers to each and every one of those sales that were unaware of the “life insurance” fraud occurring and that had fulfilled their half of the contract by tendering their funds. Unfortunately they were counting on the SEC and the SROs to provide “investor protection”. One has to feel particularly bad for the purchasers of the nonexistent Lehman shares because the securities cops that had just witnessed the Bear Stearns debacle were probably assumed to have been in a hyper-vigilant mode.

Reply
John Olagues says:
October 4, 2009 at 8:38 am
Dear Dr. Jim Costa;

Would you please tell me how naked short selling influenced the stock of Bear Stearns to open at below $4 on March 17, 2008 when it closed on Friday March 14, 2008 at $30.

You logical false argument is called “post hoc ergo propter hoc”.

In addition, after reading your comments, its clear you have never been an options market maker and have little understanding of how they operate.

I was market maker on the CBOE and at the PSE for 5 years each. During my time there, I was the volume leader and held the largest position there in many different stocks and situations.

Let me also say that every market maker that I have spoken with disagrees with the idea that “naked short selling” caused the collapse of Bear Stearns.

The idea that naked short selling, relative to Bear Stearns and probably Lehman, caused their collapse is an attempt to misdirect the focus away from the true criminals who arranged the collapse. Although maybe useful idiots like some commentators here truly believe the misdirection, the ones near the top are very much aware of the truth of what I say.

John Olagues

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Jim Hall says:
October 3, 2009 at 9:32 am
I feel mighty comfortable with that Schapiro gal in the SEC:

from WSJ (partial)

Report Cites Finra Lapses in Fraud Probes

WASHINGTON — The Financial Industry Regulatory Authority missed opportunities to uncover the Bernard Madoff fraud scheme and alleged Stanford scheme, a special committee for the brokerage industry’s self-regulatory organization concluded in a report released Friday.

The Securities and Exchange Commission and Department of Justice have accused financier R. Allen Stanford of orchestrating a multibillion-dollar Ponzi scheme. The report, commissioned by the board of Finra, makes recommendations for improving its examination …

Reply
Anonymous says:
October 3, 2009 at 10:33 am
registeredrep.com/mag/finance_sec_uncovers_widespread/

Reply
Anonymous says:
October 3, 2009 at 10:34 am
www.investmentnews.com/article/19980907/SUB/809070708

Reply
Anonymous says:
October 3, 2009 at 10:35 am
www.forbes.com/forbes/97/0224/5904114a_print.html

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Paying On Time - Credit Cards » Rolling Stone Reports that Naked Short Selling Killed Bear Stearns and Lehman Brothers says:
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October 1, 2009 at 2:31 pm
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Tweets that mention Rolling Stone Reports that Naked Short Selling Killed Bear Stearns and Lehman Brothers | Deep Capture: exposing the crime of naked short selling -- Topsy.com says:
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Rolling Stone Reports that Naked Short Selling Killed Bear Stearns and Lehman Brothers | NWOTruth says:
October 2, 2009 at 6:27 pm

[sandi66]

Debate Heats Up Over Naked Short-Selling
September 30, 2009, 7:56 pm The debate over short-selling took center stage in Washington on Wednesday as government officials and representatives from Wall Street discussed the possibility of implementing new and tougher regulations that could have a serious effect on the lucrative securities lending business.

Investment firms are trying to persuade legislators that the practice known as naked short-selling is acceptable and that further restrictions on this practice would be detrimental to market liquidity. Naked short-selling differs from a conventional short sale because the financial instrument being sold short is not borrowed immediately as traders bet on declining prices.
The Securities and Exchange Commission is concerned about the trading technique, as it has been reported that naked short-selling by large financial firms contributed in the quick downward spiral in some stocks last year — including those of Bear Stearns and Lehman Brothers, the ill-fated securities firms.

“The commission is concerned about abusive ‘naked’ short selling and persistent fails to deliver and the potentially manipulative effect this activity can have on our markets,” the commission’s chairwoman, Mary L. Schapiro, said at an S.E.C. roundtable on Wednesday. “Thus, we are examining whether a pre-borrow or ‘hard locate’ requirement or another alternative is necessary or would be effective in addressing such activity and preventing market manipulation.”

Wall Street is pushing hard to convince the S.E.C. and lawmakers that further rules to curb short selling abuses, including naked shorting, are unnecessary. Goldman Sachs has argued in regulatory filings that restriction to short-selling that were put in place last year, some of which were made permanent over the summer, have already cut down on abuses. They argue that further regulatory road blocks would hurt, not help, investors.

Senator Ted Kaufman, Democrat of Delaware, is among those lawmakers who are not buying Goldman’s argument and is pushing for beefed-up regulatory oversight of short-selling and an outright ban on naked shorting.

“There is good evidence to say that Bear Stearns went down due to abusive short-selling,” Mr. Kaufman told DealBook. “I think all the folks that were involved and made money off that event are still around, and we have done nothing, nothing, nothing to change the system.”

Mr. Kaufman is concerned that if the market starts to fall sharply again, traders will use abusive short-selling techniques to make money, threatening vulnerable companies.

“We are going to have another bear market,” Mr. Kaufman said. “The folks that know how to make money in a bear market by doing these bear raids, taking advantage of the fact that there is no uptick rule and there is no real hard locate rules, will go and replicate what they have done before and bring down some other companies.”

The S.E.C. will decide on whether tougher rules should be put in place in the next few months. But Mr. Kaufman has said that if the S.E.C. fails to act, he will move to legislate the changes through Congress.

– Cyrus Sanati

dealbook.blogs.nytimes.com/2009/09/30/debate-heats-up-over-naked-short-selling/

[sandi66]

SEC loses taste for short-selling fight
Commentary: Commission targets 'naked' shorts

September 30, 2009

NEW YORK (MarketWatch) -- More than a year after short-sellers allegedly sucked the broader market lower by concentrating negative bets in troubled financial firms, the nation's securities regulators appear to be backing off curbing the practice.


The SEC on Wednesday said it is considering curbing so-called naked shorts -- short sellers who don't locate and borrow the stock they base their bearish bets on. Mary Schapiro, SEC chairman, said the commission will hold a regulatory roundtable on the practice. See full story.

The problem is that there is almost universal agreement that Schapiro's target, naked shorts, are problematic. Even its supporters have to be surprised naked shorting hasn't been banned. No one would have thought a year ago, given the deep losses suffered last year, that naked short selling would still be a market practice today.

Meanwhile, another Schapiro priority, the return of the uptick rule, appears to be losing steam. Wall Street firms including the Vanguard Group Inc. and Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs (GS 179.61, +0.62, +0.35%) are publicly fighting the measure, and prospects for bringing back the rule, which requires a stock to move higher before a short-sale order can be placed, are dimming. See full story.

That's alarming given that many market strategists believe the uptick rule put a brake on short-selling panics. The rule was eliminated in 2007.

Critics argue that a ban on naked shorting, short selling or a new uptick rule would eliminate market liquidity and the changes would limit the ability of traders to make profits and hedge their long bets.

They complained that implementing naked-short-selling bans last fall was an unfair rule change in the middle of the game. The SEC, under Christopher Cox, argued that an emergency ban was necessary because an urgent market situation required it.

More than a year later, the urgency seems to be gone, at least at the SEC.

David Weidner

www.marketwatch.com/story/sec-losing-its-taste-for-fighting-short-selling-2009-09-30

[sandi66]

www.msnbc.msn.com/id/26852192/vp/33087076#33087076

"Way Too Early" Wall Street's Naked Swindle

[sandi66]

i.realone.com/assets/rn/img/5/3/8/7/30267835.jpg

Matt Taibbi "Wall Street Naked Swindle"

ty luckieeguy

[sandi66]

Matt Taibbi: The S.E.C. Still Hasn't Released the Data on Who Was Doing Naked Short Selling
By Heather Saturday Oct 03, 2009 6:30pm



From CNN's Your Money, it looks like the S.E.C. is as feckless as ever with reigning in these crooks. Matt Taibbi has much more over at his blog True/Slant.

ROMANS: All right. This is the ticker where each week we take you beyond the headlines. Shawn Tully is editor at large at Fortune and Matt Taibbi is a contributing editor with Rolling Stone. Let's be blunt, Matt is not a beloved figure on Wall Street these days which stems from articles like the one out in this week's Rolling Stone entitled "Wall Street's Naked Swindle." You can pick it up for all the details.

But let's examine a few of the overall themes. You say Wall Street is designed to rip off the middle class and you make the case that our economy is currently so screwed up, actually that's not the word you use, imagine a word by mistake on "SNL" and that is the word you meant. Screwed up that the rich are running out of things to steal. What's worse is that Matt argues that no one, not the S.E.C., the Federal Reserve, or the Treasury Department is making any real effort to punish the culprits.

For starters, who specifically are the culprits and why aren't they being punished?

MATT TAIBBI, CONTRIBUTING EDITOR, ROLLING STONE: Well in the story that I looked specifically at two cases, Bear Stearns and Lehman Brothers and what happened in those companies and what I found is that there was a kind of bear raid that had been happening to smaller firms in years previous to the Bear and Lehman episodes where there was sort of a pattern of credit default swaps.

People who were buying, naked short selling of these stocks, rumors being spread in the media. This was always happening in the smaller companies and hedge funds and predatory, you know, sellers were doing this to small companies.

In this instance, they did it to Bear Stearns and Lehman Brothers. There was a massive amount of undelivered shares and obvious evidence of naked short selling and manipulation in these instances. It was clear that they had run out of smaller companies to do this to.

ROMANS: So who did it?

TAIBBI: Well that's the problem. We don't know. This data is available to the S.E.C., it is a relatively simple matter to find out who was doing all this naked short selling but they haven't released the data and a year and a half later, they haven't made any progress in an investigation at all.

ROMANS: Well, the criticism that I hear most often is that after the decline of Bear, why didn't they figure out some way to resolve this if this happened to Lehman? Why was it that they were left when Lehman was in trouble, the Federal government that is, you know, our regulators, to try and figure out what to do about Lehman?

SHAWN TULLY, EDITOR AT LARGE, FORTUNE: Well, Lehman was in a different position from Bear. Lehman was really insolvent. Lehman's liabilities were much bigger than their assets so they had a big negative net worth which we're seeing playing out now in the bankruptcy filings where they clearly were leveraged by 40 to one. They were funding with very short-term ...

ROMANS: 40-1. Isn't that crazy?

TULLY: 40 to 1. They were leveraging with very short-term debt, liquid assets, they had loans out on a lot of commercial buildings which they made at the absolute height of the bubble. So they couldn't get out of their investments and fund themselves and pay back the short-term debt when there was essentially a run on the short-term debt, given that they really were insolvent. Their fall was inevitable.

It was hastened by the short selling problem but I think in the Bear case, Bear was a viable company. It did have a positive net worth and perhaps, and Jamey Diamond has said this from JP Morgan that he thinks the demise of Bear may have been caused by short sellers. Of course he bought it and he got a good deal but you look at the building alone is probably worth a billion dollars. I think that Bear was a viable concern but perhaps was toppled strictly by the psychology of the short sellers.

TAIBBI: It is important to remember there is a distinction also between normal short selling and naked short selling. Both happened in both of these cases, but naked short selling in most cases is illegal and criminal and there was enormous evidence of this in both the Bear and Lehman episodes.

ROMANS: Tell our viewers what is the difference between naked short selling and plain old every day short selling.

TAIBBI: Naked short selling is selling shares that you don't have and share that you aren't going to deliver. In the normal short selling you borrow shares, you sell them out in the market, you wait for the price to drop and then you go out in the market and you buy the shares again and you return them to the person you borrowed from. In naked short selling you just don't even borrow the shares. You just sell without ever having them. And this produces extra shares in the market and devalues the value of the stock.

ROMANS: Someone at Bear once told me short selling is just a good bet or a hunch but naked short telling is just cruel.

TAIBBI: It's counterfeit is what it is.

TULLY: Profiting at someone else's misery. Matt has amazing examples of the story. He compares it to going to a desert island and having a printing press and being able to buy anything you want with printed money and you have to pay it back when you leave and it's worthless.

ROMANS: Matt did a story about Goldman Sachs recently. What was the -- blood sucking -- what was the line that everyone talks about?

TAIBBI: Great vampire squid wrapped around the face of humanity.

ROMANS: Yeah. That was a piece of journalism that got a lot of people's attention and had some I would say savage humor in it about what has happened here. A lot of people can't really laugh because it has been such a treacherous last year. We're still sorting through the wreckage of it all.

I want to switch gears and talk about another story, something people can't understand, and that is the story about bank fees. This is when you know right away when you're getting hit with these things and it's something you can definitely see and understand as its happening. I want to follow up on a story a couple weeks ago that garnered a huge response to review.

Ann Minch was the Michigan woman who claimed Bank of America had raised her credit card interest rates to 30 percent and then she took to YouTube to let everybody know she wasn't paying until the company came to the bargaining table.

(BEGIN VIDEO CLIP)

ANN MINCH, BANK PROTESTER: I'm telling you, B of A. I officially notify you. Ken Lay that I'm staging a debtor's revolt right here right now and thereby refuse to pay you one more red cent on your 30 percent credit card account. This is called civil disobedience.

(END VIDEO CLIP)

ROMANS: OK. To make clear when Minch says Ken Lay she actually is targeting Bank of America CEO Ken Lewis and not Ken Lay the deceased former head of Enron. Enron a whole other story that made people mad. While Minch never heard from Lewis she does claim that a Bank of America rep got in touch with her and her rate was dropped from 30 percent to just under 13 percent.

We asked Bank of America and they told us they don't discuss specific details but they did reach a mutually agreeable resolution. She says a tax revolt is now in the works. Shawn Tully looks like this a revolution? People are so mad they're not going to take anymore.

TULLY: I'm really applauding her, 30 percent is an outrageous number. When we have the treasuries at 3 percent it's ridiculous. The bank should have been embarrassed. Fortunately they did get an executive to call her. They eventually settled on letting her go back to her original rate but even if she had a couple late payments which apparently she did have but they were only a couple days late, jacking your rate up from 13 to 30 percent is absolutely ridiculous.

It's a penalty that someone who has essentially a good payment history, who lost her job but still has the resources to pay, should never have to go through. And the only way to get these banks really to do the right thing is to embarrass them.

ROMANS: Right.

TULLY: Bank of America clearly was embarrassed. The line about Ken Lay instead of Ken Lewis the late head of Enron, you couldn't make it up it's so funny.

ROMANS: She had some savvy points. She said look, the Fed is loaning money for essentially nothing and then they're turning around and giving me that money back and now I'm paying 30 percent for it even when I'm paying ...

TAIBBI: She is absolutely right. I think the people should organize debtor strikes because beyond even embarrassing these companies they have to hurt them at the bottom line. Then they'll pay attention. I think even 5 or 10 percent of the people who owe these debts if they organize they would do a lot of damage.

ROMANS: Some of these debts people have to take responsibility for. You've spent money that you don't have and now you lost your job and the world is trying to reel in the credit because times have changed. Thirty percent seems really excessive but we also want to make sure we send a message, people have to cut down -- people have to handle their debt. They have to handle and get their debt under control.

TULLY: Yeah. These credit card defaults are now in the 12 percent range at Bank of America.

ROMANS: So that is why Bank of America is raising its rates on everybody because they're losing money.

TULLY: But 30 percent is going to drive the default rate up. In other words they have to work with these people to give them payments they can afford. I don't think 30 percent is moving in that direction.

Video there also

videocafe.crooksandliars.com/heather/matt-taibbi-sec-still-hasnt-released-data

ty PJ

[sandi66]

Rolling Stone Interviews Cast Member of Financial Film "Stock Shock-The Short Selling of the American Dream"

October 5, 2009

Former DTCC operations manager and star of "Stock Shock" Susanne Trimbath is interviewed by Matt Taibbi for his latest article in Rolling Stone. She blows the whistle on the world's largest central depository by revealing that she warned them 15 years ago of an impending financial crisis.

New York, NY (PRWEB) October 5, 2009 -- Rolling Stone's own Matt Taibbi interviewed industry expert Susanne Trimbath, Chief Economist at STP Advisory Services, LLC in Omaha, for his latest article in the magazine article about financial corruption. The piece spotlights naked short selling and fall of Bear Stearns and Lehman Brothers.

In his new article, Trimbath tells Taibbi the story of how, in 1993, she tried to get senior management at the world's largest central depository (Depository Trust Company) to stop allowing shares of stock in US companies to be multiplied through stock lending and excessive short selling. "You can't balance the world," was the response she got from regulators. She contends this is because "Wall Street is self-regulated and they don't want to write regulations against themselves." By 2003, the size of the problem had increased ten-fold; by 2008 it contributed to the collapse of major financial institutions and the global financial crisis.

Trimbath is also featured in the financial film, "Stock Shock: The Short Selling of the American Dream" which documents the alleged massive short selling of Sirius XM radio stock. Sirius XM stock sank to five cents per share earlier this year. In the film, she explains in great detail the process of naked short selling and the impact failed trades have on shareholders and the American economy.

Susanne Trimbath holds the Ph.D. degree in economics from New York University. She is an expert on post-trade securities operations and is featured in several films about Wall Street. She frequently acts as an expert witness in securities litigation. Trimbath is a former mid-level operations manager at Depository Trust Company (now a subsidiary of Depository Trust and Clearing Corporation in New York). She currently heads STP Advisory Services.

"Stock Shock:The Short Selling of the American Dream" was recently released on DVD and has received good reviews. The "Stock Shock" movie trailer can be seen at www.stockshockmovie.com.

###

Mohr Productions, Inc.
Denise Hubbard
213-446-6334
E-mail Information

tinyurl.com/ybb5jcl

[sandi66]

October 15th cover of the Rolling Stone magazine features
the Matt Tabbi article
"Wall Streets Naked Swindle"

Susanne Trimbath is quoted therein

i.realone.com/assets/rn/img/5/3/8/7/30267835.jpg

Cover Of The Rolling Stone

Dr.Hook

www.youtube.com/watch?v=-Ux3-a9RE1Q

Wall Street's Naked Swindle

A scheme to sell fake stocks helped kill Bear Sterns and Lehman Brothers

exposing the counterfeit nature of our entire economy.

By Matt Taibbi

www.rollingstone.com/issue1089



ty luckieeguy

[sandi66]

On Rolling Stone, Penson Financial, the Mafia, and Naked Short Selling
Posted on 07 October 2009 by Mark Mitchell
Tags: Adler Coleman, Hanover Sterling, Mafia, Matt Taibbi, naked short selling, organized crime, Penson Financial, Rolling Stone, SEC
As should be clear from the contents of Deep Capture, the world of illegal naked short selling is a weird one, populated by sociopathic billionaires, slick lobbyists, famous felons, bent regulators, crooked law firms, corporate spies, message board maniacs, sinister banks, shifty private investigators, mendacious professors, professional dissemblers, propagandists, grifters, thugs, liars, and the Mafia.

Things become all the more weird when you consider that regulators and law enforcement do almost nothing to stop naked short selling, even though a growing number of prominent people – everyone from U.S. Senators to George Soros – insist that criminal naked short sellers helped take down Bear Stearns, Lehman Brothers, and the American financial system. Then there’s the weird fact that anybody who tries to shed light on this weird state of affairs is quickly subjected to smear campaigns that are…weird.

Anyway, message to Matt Taibbi: Welcome to our world.

Taibbi, as many people know, is the star reporter who published a major expose about naked short selling in the most recent issue of Rolling Stone magazine. In addition, he has published a few blogs providing more evidence to support his claim that illegal naked short selling is a big deal and it’s pretty “hilarious,” as he puts it, that the government hasn’t prosecuted the people who might have helped crash the financial system.

In one of his blogs (which you can read here), Taibbi posts a video that seems to show a day trader conducting a short sale of stock in an unnamed big bank through a brokerage called Penson Financial. The SEC says that short sellers have to have “reasonable grounds” that they can locate actual stock to deliver to their buyers. As Taibbi rightly points out, this is a “very funny piece of regulatory policy – asking greedy ass financial companies to determine what to them is a ‘reasonable’ effort to follow the rules. “

At any rate, if you believe what you see in Taibbi’s video, Penson Financial gave that day trader a phony “locate” on quite a few of the unnamed big bank’s shares. In fact, the video seems to show Penson Financial confirming that it had “located” many billions of the unnamed big bank’s shares – altogether, five times as many shares as were then in circulation. In other words, it seems that if this trader had had the inclination and the funds, Penson would have accepted a massive naked short sale, helping the trader flood the market with billions upon billions of shares that simply did not exist.

This is rather important, because Deep Capture has reviewed evidence showing that little Penson Financial and one other relatively unknown firm were by far the biggest traders in financial stocks in the first nine months of last year, handling more than 80 percent of volume. To repeat, Penson Financial, a little firm in Dallas, Texas, and one other relatively small firm handled by far the biggest volume of trading in the stock of all those big banks that collapsed last year, leading to the worst financial crisis since the Great Depression. When it came to clearing trades in financial stocks, Penson was bigger than Goldman, bigger than Merrill, bigger than every major brokerage on Wall Street.

We do not know for certain that the trading through Penson was naked short selling. We know only that naked short selling accounted for much of the overall trading last fall in companies like Lehman Brothers. And we know that a preponderance of the overall trading went through Penson. Perhaps Penson carefully weeded out the naked short sellers, in which case it handled almost all of the trading in financial stocks except for naked short selling. But if Taibbi’s video is any indication, Penson was certainly willing to locate stock that did not exist.

If I have anything to add to Taibbi’s terrific reporting, it is this: Penson Financial’s vice president in charge of stock clearing (that is, the head of the division that appears to have located stock that did not exist) is a man named Christopher Sandel. From 1985 to 1995, Sandel was a top executive at Adler Coleman, best known for being the clearing firm to the Genovese Mafia family.

Adler Coleman famously went bust when its top customer, the Genovese-controlled brokerage Hanover Sterling, self-imploded in one of the greatest naked short selling scandals of all time. Several traders tied to the Gambino crime family were charged with naked short selling companies that were underwritten by Hanover. That the Genovese Mafia brokers at Hanover were not charged in this case seems odd, because the most likely scenario is that the Genovese underwrote hapless companies, pumped their stock prices, and then called in the Gambinos to vaporize the companies, with everybody profiting on the way down.

Anyway, when some of America’s biggest financial companies collapsed under a barrage of short selling last fall, an enormous chunk of that trading was being cleared by a fellow who used to work for a company that seemed to specialize in clearing trades for the Mafia. Should this concern us? Might the Mafia have played some role in the collapse of the financial system? If I were more heavily armed, I would venture an opinion.

Now, of course, there is a concerted effort to portray Taibbi as a sucker, and his video as a fake. One blogger who has suggested as much is Gary Weiss, a former BusinessWeek reporter. As we have documented elsewhere on Deep Capture, Gary Weiss is a corrupt pseudo-journalist whose sources have included naked short sellers with ties to the Mob. Among Gary’s favorite sources were John Fiero (fined $1 million in Hanover Sterling scandal), Anthony Elgindy (currently serving an 11 year prison sentence for short selling crimes and alleged to have had his finger sawed off by Russian mafiosi who were concerned that he would become a government informer), and Manuel Asensio (who once worked for a Mafia-controlled brokerage called First Hanover).

Weiss has reported extensively on the Mafia’s infiltration of Wall Street, but he has, for years, insisted that only conspiracy theorists believe naked short selling is problem. He wrote a great deal about Hanover Sterling, but not once did he mention that naked short selling was central to that case. In his book, “The Mob on Wall Street,” Weiss told the story of a Genovese Mafia broker, and mentioned that this Mafia broker claimed to clear his trades through none other than…Penson Financial.

But, of course, Gary insisted that the Mafia broker must have been lying, because Penson is a “legitimate firm.”

Meanwhile, a blog called ClusterStock has also suggested that Taibbi’s video is a “hoax.” Taibbi has written a fine rebuttal to that claim (which you can read here), so I have nothing to add, except that ClusterStock was founded by Henry Blodget, who was famously charged with securities fraud in 2002, and by the former co-owners of DoubleClick, a company that was once defrauded by the Colombo Mafia family. DoubleClick was never charged with any crimes, as it was, alas, the victim. Such is the sad fate of many firms that have business dealings with the Mafia (of course, this fate may be avoided by adhering to a simple dictum: “Avoid having dealings with the Mafia”).

I tell you this not because I think there is some kind of conspiracy, but merely because I am fascinated by the always colorful biographies of people who attack those who seek to expose the crime of naked short selling. Blodget is, by all accounts, a reformed criminal, and I’m sure the other people at ClusterStock are law-abiding people. Gary Weiss would be perfectly innocent, too — except that he’s an out-and-out fraud.

Recently, Deep Capture reporter Judd Bagley revealed that Weiss was the anonymous author of a blog on the popular website Daily Kos. This blog, of course, denied that naked short selling is a crime, while smearing those who said otherwise. To support its smears, the blog, written by the anonymous Gary Weiss, referred readers to another blog, written by none other than Gary Weiss. Indeed, Gary Weiss has had a great many phony on-line aliases, and all of these Gary Weiss aliases proclaim that Gary Weiss is right and great.

In a variation of this on-line chicanery, ClusterStock’s writers littered the comments section of Taibbi’s blog with allegations that his video was a “hoax.” To support these allegations, the ClusterStock writers provided links to another blog…ClusterStock. Presumably, Gary Weiss will also provide links to ClusterStock. Oh wait, he already did that.

Meanwhile, Penson Financial, has written a letter to the SEC, suggesting that Taibbi’s video was (what else?)…”a hoax.” In the letter, Penson Financial, which was fined in 2006 for naked short selling, promises that it does not engage in naked short selling.

The SEC no doubt believes this.




Comments:

This post was written by:
Mark Mitchell - who has written 58 posts on Deep Capture: exposing the crime of naked short selling.




Contact the author

« Rolling Stone Reports that Naked Short Selling Killed Bear Stearns and Lehman Brothers4 Responses to “On Rolling Stone, Penson Financial, the Mafia, and Naked Short Selling”
Elaine M. says:
October 7, 2009 at 7:38 pm
Intersting article!

I think it’s funny that the folks at ClusterStock first claimed that the short selling video that Taibbi posted was a fake–and later asserted that the video showed “the system working properly.” Weisenthal–in one of his posts–provided a link to another blogger named “Kid Dynamite”…so we could get his expert opinion on the matter.

I guess Taibbi has made a lot of enemies–as I would guess most “real” journalists do.

Reply
Judd Bagley says:
October 7, 2009 at 8:23 pm
You make an excellent point, Elaine. It’s honestly funny to see the bad guys fall all over themselves the way they are. More than anything, this is the ultimate vindication of everything else Matt Taibbi has written on the subject. They can’t touch any of that, so they hammer away at the one thing Matt can’t prove empirically; and since he’s presumably made commitments to a source, he’s limited by what he can say in response.
Yet they’re deafeningly silent on the truly d**ning stuff, which appeared in Rolling Stone this week.
Hacks like John Carney and Joe Weisenthal need to wake up to the reality that mindless defense of the shorts went out of style a while ago.

Reply
Jim Hall says:
October 7, 2009 at 10:38 pm
Please keep up the heat.
The fate of the nation hangs on this, unless it’s already too late.

Reply
Lenofus says:
October 8, 2009 at 7:27 am
Ah, Jim. It’s not that bad. We can all become “Gumbahs”.

So, enjoy your day. A corrupt Congress, Regulatory system. Finra/rico, As Marcopolous said. Do what I do…….

“fuhgetaboutit!”

www.deepcapture.com/on-rolling-stone-penson-financial-the-mafia-and-naked-short-selling/

ty AlanC

[sandi66]

Wall Street's Naked Swindle
A scheme to flood the market with counterfeit stocks helped kill Bear Stearns and Lehman Brothers — and the feds have yet to bust the culprits

MATT TAIBBI

Posted Oct 14, 2009 9:30 AM

Watch Matt Taibbi break down short-selling vs. naked short-selling on his blog, Taibblog.

On Tuesday, March 11th, 2008, somebody — nobody knows who — made one of the craziest bets Wall Street has ever seen. The mystery figure spent $1.7 million on a series of options, gambling that shares in the venerable investment bank Bear Stearns would lose more than half their value in nine days or less. It was madness — "like buying 1.7 million lottery tickets," according to one financial analyst.

But what's even crazier is that the bet paid.

At the close of business that afternoon, Bear Stearns was trading at $62.97. At that point, whoever made the gamble owned the right to sell huge bundles of Bear stock, at $30 and $25, on or before March 20th. In order for the bet to pay, Bear would have to fall harder and faster than any Wall Street brokerage in history.

The very next day, March 12th, Bear went into free fall. By the end of the week, the firm had lost virtually all of its cash and was clinging to promises of state aid; by the weekend, it was being knocked to its knees by the Fed and the Treasury, and forced at the barrel of a shotgun to sell itself to JPMorgan Chase (which had been given $29 billion in public money to marry its hunchbacked new bride) at the humiliating price of … $2 a share. Whoever bought those options on March 11th woke up on the morning of March 17th having made 159 times his money, or roughly $270 million. This trader was either the luckiest guy in the world, the smartest son of a pregnant dog ever or…

Or what? That this was a brazen case of insider manipulation was so obvious that even Sen. Chris Dodd, chairman of the pillow-soft-touch Senate Banking Committee, couldn't help but remark on it a few weeks later, when questioning Christopher Cox, the then-chief of the Securities and Exchange Commission. "I would hope that you're looking at this," Dodd said. "This kind of spike must have triggered some sort of bells and whistles at the SEC. This goes beyond rumors."

Cox nodded sternly and promised, yes, he would look into it. What actually happened is another matter. Although the SEC issued more than 50 subpoenas to Wall Street firms, it has yet to identify the mysterious trader who somehow seemed to know in advance that one of the five largest investment banks in America was going to completely tank in a matter of days. "I've seen the SEC send agents overseas in a simple insider-trading case to investigate profits of maybe $2,000," says Brent Baker, a former senior counsel for the commission. "But they did nothing to stop this."

The SEC's halfhearted oversight didn't go unnoticed by the market. Six months after Bear was eaten by predators, virtually the same scenario repeated itself in the case of Lehman Brothers — another top-five investment bank that in September 2008 was vaporized in an obvious case of market manipulation. From there, the financial crisis was on, and the global economy went into full-blown crater mode.

Like all the great merchants of the bubble economy, Bear and Lehman were leveraged to the hilt and vulnerable to collapse. Many of the methods that outsiders used to knock them over were mostly legal: Credit markers were pulled, rumors were spread through the media, and legitimate short-sellers pressured the stock price down. But when Bear and Lehman made their final leap off the cliff of history, both undeniably got a push — especially in the form of a flat-out counterfeiting scheme called naked short-selling.

That this particular scam played such a prominent role in the demise of the two firms was supremely ironic. After all, the boom that had ballooned both companies to fantastic heights was basically a counterfeit economy, a mountain of paste that Wall Street had built to replace the legitimate business it no longer had. By the middle of the Bush years, the great investment banks like Bear and Lehman no longer made their money financing real businesses and creating jobs. Instead, Wall Street now serves, in the words of one former investment executive, as "Lucy to America's Charlie Brown," endlessly creating new products to lure the great herd of unwitting investors into whatever tawdry greed-bubble is being spun at the moment: Come kick the football again, only this time we'll call it the Internet, real estate, oil futures. Wall Street has turned the economy into a giant asset-stripping scheme, one whose purpose is to suck the last bits of meat from the carcass of the middle class.

What really happened to Bear and Lehman is that an economic drought temporarily left the hyenas without any more middle-class victims — and so they started eating each other, using the exact same schemes they had been using for years to fleece the rest of the country. And in the forensic footprint left by those kills, we can see for the first time exactly how the scam worked — and how completely even the government regulators who are supposed to protect us have given up trying to stop it.

This was a brokered bloodletting, one in which the power of the state was used to help effect a monstrous consolidation of financial and political power. Heading into 2008, there were five major investment banks in the United States: Bear, Lehman, Merrill Lynch, Morgan Stanley and Goldman Sachs. Today only Morgan Stanley and Goldman survive as independent firms, perched atop a restructured Wall Street hierarchy. And while the rest of the civilized world responded to last year's catastrophes with sweeping measures to rein in the corruption in their financial sectors, the United States invited the wolves into the government, with the popular new president, Barack Obama — elected amid promises to clean up the mess — filling his administration with Bear's and Lehman's conquerors, bestowing his papal blessing on a new era of robbery.

To the rest of the world, the brazenness of the theft — coupled with the conspicuousness of the government's inaction — clearly demonstrates that the American capital markets are a crime in progress. To those of us who actually live here, however, the news is even worse. We're in a place we haven't been since the Depression: Our economy is so completely f**ked, the rich are running out of things to steal.

If you squint hard enough, you can see that the derivative-driven economy of the past decade has always, in a way, been about counterfeiting. At their most basic level, innovations like the ones that triggered the global collapse — credit-default swaps and collateralized debt obligations — were employed for the primary purpose of synthesizing out of thin air those revenue flows that our dying industrial economy was no longer pumping into the financial bloodstream. The basic concept in almost every case was the same: replacing hard assets with complex formulas that, once unwound, would prove to be backed by promises and IOUs instead of real stuff. Credit-default swaps enabled banks to lend more money without having the cash to cover potential defaults; one type of CDO let Wall Street issue mortgage-backed bonds that were backed not by actual monthly mortgage payments made by real human beings, but by the wild promises of other irresponsible lenders. They even called the thing a synthetic CDO — a derivative contract filled with derivative contracts — and nobody laughed. The whole economy was a fake.

For most of this decade, nobody rocked that fake economy — especially the faux housing market — better than Bear Stearns. In 2004, Bear had been one of five investment banks to ask the SEC for a relaxation of lending restrictions that required it to possess $1 for every $12 it lent out; as a result, Bear's debt-to-equity ratio soared to a staggering 33-1. The bank used much of that leverage to issue mountains of mortgage-backed securities, essentially borrowing its way to a booming mortgage business that helped drive its share price to a high of $172 in early 2007.

But that summer, Bear started to crater. Two of its hedge funds that were heavily invested in mortgage-backed deals imploded in June and July, forcing the credit-raters at Standard & Poor's to cut its outlook on Bear from stable to negative. The company survived through the winter — in part by jettisoning its dipshit CEO, Jimmy Cayne, a dithering, weed-smoking septuagenarian who was spotted at a bridge tournament during the crisis — but by March 2008, it was almost wholly dependent on a network of creditors who supplied it with billions in rolling daily loans to keep its doors open. If ever there was a major company ripe to be assassinated by market manipulators, it was Bear Stearns in 2008.

Then, on March 11th — around the same time that mystery Nostradamus was betting $1.7 million that Bear was about to collapse — a curious thing happened that attracted virtually no notice on Wall Street. On that day, a meeting was held at the Federal Reserve Bank of New York that was brokered by Fed chief Ben Bernanke and then-New York Fed president Timothy Geithner. The luncheon included virtually everyone who was anyone on Wall Street — except for Bear Stearns.


Bear, in fact, was the only major investment bank not represented at the meeting, whose list of participants reads like a Barzini-Tattaglia meeting of the Five Families. In attendance were Jamie Dimon from JPMorgan Chase, Lloyd Blankfein from Goldman Sachs, James Gorman from Morgan Stanley, Richard Fuld from Lehman Brothers and John Thain, the big-spending office redecorator still heading the not-yet-fully-destroyed Merrill Lynch. Also present were old Clinton hand Robert Rubin, who represented Citigroup; Stephen Schwarzman of the Blackstone Group; and several hedge-fund chiefs, including Kenneth Griffin of Citadel Investment Group.

The meeting was never announced publicly. In fact, it was discovered only by accident, when a reporter from Bloomberg filed a request under the Freedom of Information Act and came across a mention of it in Bernanke's schedule. Rolling Stone has since contacted every major attendee, and all declined to comment on what was discussed at the meeting. "The ground rules of the lunch were of confidentiality," says a spokesman for Morgan Stanley. "Blackstone has no comment," says a spokesman for Schwarzman. Rubin declined a request for an interview, Fuld's people didn't return calls, and Goldman refused to talk about the closed-door session. The New York Fed said the meeting, which had been scheduled weeks earlier, was simply business as usual: "Such informal, small group sessions can provide a valuable means to learn about market functioning from people with firsthand knowledge."

So what did happen at that meeting? There's no evidence that Bernanke and Geithner called the confidential session to discuss Bear's troubles, let alone how to carve up the bank's spoils. It's possible that one of them made an impolitic comment about Bear during a meeting held for other reasons, inadvertently fueling a run on the bank. What's impossible to believe is the bullshit version that Geithner and Bernanke later told Congress. The month after Bear's collapse, both men testified before the Senate that they only learned how dire the firm's liquidity problems were on Thursday, March 13th — despite the fact that rumors of Bear's troubles had begun as early as that Monday and both men had met in person with every key player on Wall Street that Tuesday. This is a little like saying you spent the afternoon of September 12th, 2001, in the Oval Office, but didn't hear about the Twin Towers falling until September 14th.

Given the Fed's cloak of confidentiality, we simply don't know what happened at the meeting. But what we do know is that from the moment it ended, the run on Bear was on, and every major player on Wall Street with ties to Bear started pulling IV tubes out of the patient's arm. Banks, brokers and hedge funds that held cash in Bear's accounts yanked it out in mass quantities (making it harder for the firm to meet its credit payments) and took out credit- default swaps against Bear (making public bets that the firm was going to tank). At the same time, Bear was blindsided by an avalanche of "novation requests" — efforts by worried creditors to sell off the debts that Bear owed them to other Wall Street firms, who would then be responsible for collecting the money. By the afternoon of March 11th, two rival investment firms — Credit Suisse and Goldman Sachs — were so swamped by novation requests for Bear's debt that they temporarily stopped accepting them, signaling the market that they had grave doubts about Bear.

All of these tactics were elements that had often been seen in a kind of scam known as a "bear raid" that small-scale stock manipulators had been using against smaller companies for years. But the most d**ning thing the attack on Bear had in common with these earlier manipulations was the employment of a type of counterfeiting scheme called naked short-selling. From the moment the confidential meeting at the Fed ended on March 11th, Bear became the target of this ostensibly illegal practice — and the companies widely rumored to be behind the assault were in that room. Given that the SEC has failed to identify who was behind the raid, Wall Street insiders were left with nothing to trade but gossip. According to the former head of Bear's mortgage business, Tom Marano, the rumors within Bear itself that week centered around Citadel and Goldman. Both firms were later subpoenaed by the SEC as part of its investigation into market manipulation — and the CEOs of both Bear and Lehman were so suspicious that they reportedly contacted Blankfein to ask whether his firm was involved in the scam. (A Goldman spokesman denied any wrongdoing, telling reporters it was "rigorous about conducting business as usual.")

The roots of short-selling date back to 1973, when Wall Street went to a virtually paperless system for trading stocks. Before then, if you wanted to sell shares you owned in Awesome Company X, you and the buyer would verbally agree to the deal through a broker. The buyer would take legal ownership of the shares, but only later would the broker deliver the actual, physical shares to the buyer, using an absurd, Brazil-style network of runners who carried paper shares from one place to another — a preposterous system that threatened to cripple trading altogether.

To deal with the problem, Wall Street established a kind of giant financial septic tank called the Depository Trust Company. Privately owned by a consortium of brokers and banks, the DTC centralizes and maintains all records of stock transactions. Now, instead of being schlepped back and forth across Manhattan by messengers on bikes, almost all physical shares of stock remain permanently at the DTC. When one broker sells shares to another, the trust company "delivers" the shares simply by making a change in its records.

Watch Matt Taibbi break down short-selling vs. naked short-selling on his blog, Taibblog.

This new electronic system spurred an explosion of financial innovation. One practice that had been little used before but now began to be employed with great popularity was short- selling, a perfectly legal type of transaction that allows investors to bet against a stock. The basic premise of a normal short sale is easy to follow. Say you're a hedge-fund manager, and you want to bet against the stock of a company — let's call it Wounded Gazelle International (WGI). What you do is go out on the market and find someone — often a brokerage house like Goldman Sachs — who has shares in that stock and is willing to lend you some. So you go to Goldman on a Monday morning, and you borrow 1,000 shares in Wounded Gazelle, which that day happens to be trading at $10.

Now you take those 1,000 borrowed shares, and you sell them on the open market at $10, which leaves you with $10,000 in cash. You then take that $10,000, and you wait. A week later, surveillance tapes of Wounded's CEO having sex with a woodchuck in a Burger King bathroom appear on CNBC. Awash in scandal, the firm's share price tumbles to 3½. So you go out on the market and buy back those 1,000 shares of WGI — only now it costs you only $3,500 to do so. You then return the shares to Goldman Sachs, at which point your interest in WGI ends. By betting against or "shorting" the company, you've made a profit of $6,500.

It's important to point out that not only is normal short-selling completely legal, it can also be socially beneficial. By incentivizing Wall Street players to sniff out inefficient or corrupt companies and bet against them, short-selling acts as a sort of policing system; legal short- sellers have been instrumental in helping expose firms like Enron and WorldCom. The problem is, the new paperless system instituted by the DTC opened up a giant loophole for those eager to game the market. Under the old system, would-be short-sellers had to physically borrow actual paper shares before they could execute a short sale. In other words, you had to actually have stock before you could sell it. But under the new system, a short-seller only had to make a good-faith effort to "locate" the stock he wanted to borrow, which usually amounts to little more than a conversation with a broker:

Evil Hedge Fund: I want to short IBM. Do you have a million shares I can borrow?

Corrupt Broker [not checking, playing Tetris]: Uh, yeah, whatever. Go ahead and sell.

There was nothing to prevent that broker — let's say he has only a million shares of IBM total — from making the same promise to five different hedge funds. And not only could brokers lend stocks they never had, another loophole in the system allowed hedge funds to sell those stocks and deliver a kind of IOU instead of the actual share to the buyer. When a share of stock is sold but never delivered, it's called a "fail" or a "fail to deliver" — and there was no law or regulation in place that prevented it. It's exactly what it sounds like: a loophole legalizing the counterfeiting of stock. In place of real stock, the system could become infected with "fails" — phantom IOU shares — instead of real assets.

If you own stock that pays a dividend, you can even look at your dividend check to see if your shares are real. If you see a line that says "PIL" — meaning "Payment in Lieu" of dividends — your shares were never actually delivered to you when you bought the stock. The mere fact that you're even getting this money is evidence of the crime: This counterfeiting scheme is so profitable for the hedge funds, banks and brokers involved that they are willing to pay "dividends" for shares that do not exist. "They're making the payments without complaint," says Susanne Trimbath, an economist who worked at the Depository Trust Company. "So they're making the money somewhere else."

Trimbath was one of the first people to notice the problem. In 1993, she was approached by a group of corporate transfer agents who had a complaint. Transfer agents are the people who keep track of who owns shares in corporations, for the purposes of voting in corporate elections. "What the transfer agents saw, when corporate votes came up, was that they were getting more votes than there were shares," says Trimbath. In other words, transfer agents representing a corporation that had, say, 1 million shares outstanding would report a vote on new board members in which 1.3 million votes were cast — a seeming impossibility.

Analyzing the problem, Trimbath came to an ugly conclusion: The fact that short-sellers do not have to deliver their shares made it possible for two people at once to think they own a stock. Evil Hedge Fund X borrows 100 shares from Unwitting Schmuck A, and sells them to Unwitting Schmuck B, who never actually receives that stock: In this scenario, both Schmucks will appear to have full voting rights. "There's no accounting for share ownership around short sales," Trimbath says. "And because of that, there are multiple owners assigned to one share."

Trimbath's observation would prove prophetic. In 2005, a trade group called the Securities Transfer Association analyzed 341 shareholder votes taken that year — and found evidence of over-voting in every single one. Experts in the field complain that the system makes corporate-election fraud a comically simple thing to achieve: In a process known as "empty voting," anyone can influence any corporate election simply by borrowing great masses of shares shortly before an important merger or board election, exercising their voting rights, then returning the shares right after the vote is over. Hilariously, because you're only borrowing the shares and not buying them, you can effectively "buy" a corporate election for free.

Back in 1993, over-voting might have seemed a mere curiosity, the result not of fraud but of innocent bookkeeping errors. But Trimbath realized the broader implication: Just as the lack of hard rules forcing short-sellers to deliver shares makes it possible for unscrupulous traders to manipulate a corporate vote, it could also enable them to manipulate the price of a stock by selling large quantities of shares they didn't possess. She warned her bosses that this crack in the system made the specter of organized counterfeiting a real possibility.

"I personally went to senior management at DTC in 1993 and presented them with this issue," she recalls. "And their attitude was, 'We spill more than that.'" In other words, the problem represented such a small percentage of the assets handled annually by the DTC — as much as $1.8 quadrillion in any given year, roughly 30 times the GDP of the entire planet — that it wasn't worth worrying about.

It wasn't until 10 years later, when Trimbath had a chance meeting with a lawyer representing a company that had been battered by short-sellers, that she realized someone outside the DTC had seized control of a financial weapon of mass destruction. "It was like someone figured out how to aim and fire the Death Star in Star Wars," she says. What they "figured out," Trimbath realized, was an early version of the naked-shorting scam that would help take down Bear and Lehman.

Here's how naked short-selling works: Imagine you travel to a small foreign island on vacation. Instead of going to an exchange office in your hotel to turn your dollars into Island Rubles, the country instead gives you a small printing press and makes you a deal: Print as many Island Rubles as you like, then on the way out of the country you can settle your account. So you take your printing press, print out gigantic quantities of Rubles and start buying goods and services. Before long, the cash you've churned out floods the market, and the currency's value plummets. Do this long enough and you'll crack the currency entirely; the loaf of bread that cost the equivalent of one American dollar the day you arrived now costs less than a cent.

With prices completely depressed, you keep printing money and buy everything of value — homes, cars, priceless works of art. You then load it all into a cargo ship and head home. On the way out of the country, you have to settle your account with the currency office. But the Island Rubles you printed are now worthless, so it takes just a handful of U.S. dollars to settle your debt. Arriving home with your cargo ship, you sell all the island riches you bought at a discount and make a fortune.

This is the basic outline for how to seize the assets of a publicly traded company using counterfeit stock. What naked short-sellers do is sell large quantities of stock they don't actually have, flooding the market with "phantom" shares that, just like those Island Rubles, depress a company's share price by making the shares less scarce and therefore less valuable.

The first documented cases of this scam involved small-time boiler-room grifters. In the late 1990s, not long after Trimbath warned her bosses about the problem, a trader named John Fiero executed a series of "bear raids" on small companies. First he sold shares he didn't possess in huge quantities and fomented negative rumors about a company; then, in a classic shakedown, he approached the firm with offers to desist — if they'd sell him stock at a discount. "He would press a button and enter a trade for half a million shares," says Brent Baker, the SEC official who busted Fiero. "He didn't have the stock to cover that — but the price of the stock would drop to a penny."

In 2005, complaints from investors about naked short-selling finally prompted the SEC to try to curb the scam. A new rule called Regulation SHO, known as "Reg SHO" for short, established a series of guidelines designed, in theory, to prevent traders from selling stock and then failing to deliver it to the buyer. "Intentionally failing to deliver stock," then-SEC chief Christopher Cox noted, "is market manipulation that is clearly violative of the federal securities laws." But thanks to lobbying by hedge funds and brokers, the new rule included no financial penalties for violators and no real enforcement mechanism. Instead, it merely created a thing called the "threshold list," requiring short-sellers to close out their positions in any company where the amount of "fails to deliver" exceeded 10,000 shares for more than 13 days. In other words, if counterfeiters got caught selling a chunk of phantom shares in a firm for two straight weeks, they were no longer allowed to counterfeit the stock.

A nice, if timid idea — except that it's completely meaningless. Not only has there been virtually no enforcement of the rule, but the SEC doesn't even bother to track who is targeting companies with failed trades. As a result, many stocks attacked by naked short-sellers spent years on the threshold list, including Krispy Kreme, Martha Stewart and Overstock.com.

"We were actually on it for 668 consecutive days," says Patrick Byrne, the CEO of Overstock, who became a much-ridiculed pariah on Wall Street for his lobbying against naked short-selling. At one point, investors claimed ownership of nearly 42 million shares in Overstock — even though fewer than 24 million shares in the company had actually been issued.

Byrne is not an easy person for anyone with any kind of achievement neuroses to like. He is young, good-looking, has shitloads of money, speaks fluent Chinese, holds a doctorate in philosophy and spent his youth playing hooky from high school and getting business tips from the likes of Warren Buffett. But because of his fight against naked short-selling, he has been turbofragged by the mainstream media as a tinfoil-hat lunatic; one story in the New York Post featured a picture of Byrne with a flying saucer coming out of his head.

Nonetheless, Byrne's howlings about naked short-selling look extremely prescient in light of what happened to Bear and Lehman. Over the past four years, Byrne has outlined the parameters of a naked-shorting scam that always includes some combination of the following elements: negative rumors planted in the financial press, the flooding of the market with enormous quantities of undelivered shares, absurdly high trading volumes and the prolonged appearance of the targeted company on the Reg SHO list.

In January 2005 — at the exact moment Reg SHO was launched — Byrne's own company was trading above $65 a share, and the number of failed trades in circulation was virtually nil. By March 2006, however, Overstock was down to $28 a share, and Reg SHO data indicated an explosion of failed trades — nearly 4 million undelivered shares on some days. At those moments, in other words, nearly a fifth of all Overstock shares were fake.

"This really isn't about my company," Byrne says. "I mean, I've made my money. My initial concern, of course, was with Overstock. But the more I learned about this, the more my real worry became 'Jesus, what are the implications for the system?' And given what happened to Bear and Lehman last year, I think we ended up seeing what some of those implications are."

Watch Matt Taibbi break down short-selling vs. naked short-selling on his blog, Taibblog.

Bear Stearns wasn't the kind of company that had a problem with naked short-selling. Before March 11th, 2008, there had never been a period in which significant quantities of Bear stock had been sold and then not delivered, and the company had never shown up on the Reg SHO list. But beginning on March 12th — the day after the Fed meeting that failed to include Bear, and the mysterious purchase of the options betting on the firm's imminent collapse — the number of counterfeit shares in Bear skyrocketed.

The best way to grasp what happened is to look at the data: On Tuesday, March 11th, there were 201,768 shares of Bear that had failed to deliver. The very next day, the number of phantom shares leaped to 1.2 million. By the close of trading that Friday, the number passed 2 million — and when the market reopened the following Monday, it soared to 13.7 million. In less than a week, the number of counterfeit shares in Bear had jumped nearly seventyfold.

The giant numbers of undelivered shares over the course of that week amounted to one of the most blatant cases of stock manipulation in Wall Street history. "There is not a doubt in my mind, not a single doubt" that naked short-selling helped destroy Bear, says Sen. Ted Kaufman, a Democrat from Delaware who has introduced legislation to curb such financial fraud. Asked to rate how obvious a case of naked short-selling Bear is, on a scale of one to 10, former SEC counsel Brent Baker doesn't hesitate. "Easily a 10," he says.

At the same time that naked short- sellers were counterfeiting Bear's stock, the firm was being hit by another classic tactic of bear raids: negative rumors in the media. Tipped off by a source, CNBC reporter David Faber reported on March 12th that Goldman Sachs had held up a trade with Bear because it was worried about the firm's creditworthiness. Faber noted that the hold was temporary — the deal had gone through that morning. But the damage was done; inside Bear, Faber's report was blamed for much of the subsequent panic.

"I like Faber, he's a good guy," a Bear executive later said. "But I wonder if he ever asked himself, 'Why is someone telling me this?' There was a reason this was leaked, and the reason is simple: Someone wanted us to go down, and go down hard."

At first, the full-blown speculative attack on Bear seemed to be working. Thanks to the media-fueled rumors and the mounting anxiety over the company's ability to make its payments, Bear's share price plummeted seven percent on March 13th, to $57. It still had a ways to go for the mysterious short-seller to make a profit on his bet against the firm, but it was headed in the right direction. But then, early on the morning of Friday, March 14th, Bear's CEO, Alan Schwartz, struck a deal with the Fed and JPMorgan to provide an emergency loan to keep the company's doors open. When the news hit the street that morning, Bear's stock rallied, gaining more than nine percent and climbing back to $62.

The sudden and unexpected rally prompted celebrations inside Bear's offices. "We're alive!" someone on the company's trading floor reportedly shouted, and employees greeted the news by high-fiving each other. Many gleefully believed that the short-sellers targeting the firm would get "squeezed" — in other words, if the share price kept going up, the bets against Bear would blow up in the attackers' faces.

The rally proved short-lived — Bear ended the day at $30 — but it suggested that all was not lost. Then a strange thing happened. As Bear understood it, the emergency credit line that the Fed had arranged was originally supposed to last for 28 days. But that Friday, despite the rally, Geithner and then-Treasury secretary Hank Paulson — the former head of Goldman Sachs, one of the firms rumored to be shorting Bear — had a sudden change of heart. When the market closed for the weekend, Paulson called Schwartz and told him that the rescue timeline had to be accelerated. Paulson wouldn't stay up another night worrying about Bear Stearns, he reportedly told Schwartz. Bear had until Sunday night to find a buyer or it could go f**k itself.

Bear was out of options. Over the course of that weekend, the firm opened its books to JPMorgan, the only realistic potential buyer. But upon seeing all the "shit" on Bear's books, as one source privy to the negotiations put it — including great gobs of toxic investments in the subprime markets — JPMorgan hedged. It wouldn't do the deal, it announced, unless it got two things: a huge bargain on the sale price, and a lot of public money to wipe out the "shit."

So the Fed — on whose New York board sits JPMorgan chief Jamie Dimon — immediately agreed to accommodate the new buyers, forking over $29 billion in public funds to buy up the yucky parts of Bear. Paulson, meanwhile, took care of the bargain issue, putting the government's gun to Schwartz's head and telling him he had to sell low. Really low.

On Saturday night, March 15th, Schwartz and Dimon had discussed a deal for JPMorgan to buy Bear at $8 to $12 a share. By Sunday afternoon, however, Geithner reported that the price had plunged even further. "Shareholders are going to get between $3 and $5 a share," he told Paulson.

But Paulson pissed on even that price from a great height. "I can't see why they're getting anything," he told Dimon that afternoon from Washington, via speakerphone. "I could see something nominal, like $1 or $2 per share."

Just like that, with a slight nod of Paulson's big shiny head, Bear was vaporized. This, remember, all took place while Bear's stock was still selling at $30. By knocking the share price down 28 bucks, Paulson ensured that the manipulators who were illegally counterfeiting Bear's shares would make an awesome fortune.

Although we don't know who was behind the naked short-selling that targeted Bear — short-traders aren't required to reveal their stake in a company — the scam wasn't just a fetish crime for small-time financial swindlers. On the contrary, the widespread selling of shares without delivering them translated into an enormously profitable business for the biggest companies on Wall Street, fueling the growth of a booming sector in the financial-services industry called Prime Brokerage.

As with other Wall Street abuses, the lucrative business in counterfeiting stock got its start with a semisecret surrender of regulatory authority by the government. In 1989, a group of prominent Wall Street broker-dealers — led, ironically, by Bear Stearns — asked the SEC for permission to manage the accounts of hedge funds engaged in short-selling, assuming responsibility for locating, lending and transferring shares of stock. In 1994, federal regulators agreed, allowing the nation's biggest investment banks to serve as Prime Brokers. Think of them as the house in a casino: They provide a gambler with markers to play and to manage his winnings.

Under the original concept, a hedge fund that wanted to short a stock like Bear Stearns would first "locate" the stock with his Prime Broker, then would do the trade with a so-called Executing Broker. But as time passed, Prime Brokers increasingly allowed their hedge-fund customers to use automated systems and "locate" the stock themselves. Now the conversation went something like this:

Evil Hedge Fund: I just sold a million shares of Bear Stearns. Here, hold this shitload of money for me.

Prime Broker: Awesome! Where did you borrow the shares from?

Evil Hedge Fund: Oh, from Corrupt Broker. You know, Vinnie.

Prime Broker: Oh, OK. Is he sure he can find those shares? Because, you know, there are rules.

Evil Hedge Fund: Oh, yeah. You know Vinnie. He's good for it.

Prime Broker: Sweet!

Following the SEC's approval of this cozy relationship, Prime Brokers boomed. Indeed, with the rise of discount brokers online and the collapse of IPOs and corporate mergers, Prime Brokerage — in essence, the service end of the short- selling business — is now one of the most profitable sectors that big Wall Street firms have left. Last year, Goldman Sachs netted $3.4 billion providing "securities services" — the lion's share of it from Prime Brokerage.

When one considers how easy it is for short-sellers to sell stock without delivering, it's not hard to see how this can be such a profitable business for Prime Brokers. It's really a license to print money, almost in the literal sense. As such, Prime Brokers have tended to be lax about making sure that their customers actually possess, or can even realistically find, the stock they've sold. That point is made abundantly clear by tapes obtained by Rolling Stone of recent meetings held by the compliance officers for big Prime Brokers like Goldman Sachs, Morgan Stanley and Deutsche Bank. Compliance officers are supposed to make sure that traders at their firms follow the rules — but in the tapes, they talk about how they routinely greenlight transactions they know are dicey.

In a conference held at the JW Marriott Desert Ridge Resort in Phoenix in May 2008 — just over a month after Bear collapsed — a compliance officer for Goldman Sachs named Jonathan Breckenridge talks with his colleagues about how the firm's customers use an automated program to report where they borrowed their stock from. The problem, he says, is the system allows short-sellers to enter anything they want in the text field, no matter how nonsensical — or even leave the field blank. "You can enter ABC, you can enter Go, you can enter Locate Goldman, you can enter whatever you want," he says. "Three dots — I've actually seen that."

The room erupts with laughter.

After making this admission, Breckenridge asks officials from the Securities Industry and Financial Markets Association, the trade group representing Wall Street broker-dealers, for guidance in how to make this appear less blatantly improper. "How do you have in place a process," he wonders, "and make sure that it looks legit?"

The funny thing is that Prime Brokers didn't even need to fudge the rules. They could counterfeit stocks legally, thanks to yet another loophole — this one involving key players known as "market makers." When a customer wants to buy options and no one is lining up to sell them, the market maker steps in and sells those options out of his own portfolio. In market terms, he "provides liquidity," making sure you can always buy or sell the options you want.

Under what became known as the "options market maker exception," the SEC permitted a market maker to sell shares whether or not he had them or could find them right away. In theory, this made sense, since delaying the market maker from selling to offset a big buy order could dry up liquidity and slow down trading. But it also created a loophole for naked short-sellers to kill stocks easily — and legally. Take Bear Stearns, for example. Say the stock is trading at $62, as it was on March 11th, and someone buys put options from the market maker to sell $1.7 million in Bear stock nine days later at $30. To offset that big trade, the market maker might try to keep his own portfolio balanced by selling off shares in the company, whether or not he can locate them.

But here's the catch: The market maker often sells those phantom shares to the same person who bought the put options. That buyer, after all, would love to snap up a bunch of counterfeit Bear stock, since he can drive the company's price down by reselling those fake shares. In fact, the shares you buy from a market maker via the SEC-sanctioned loophole are sometimes called "bullets," because when you pump these counterfeit IOUs into the market, it's like firing bullets into the company — it kills the price, just like printing more Island Rubles kills a currency.

Which, it appears, is exactly what happened to Bear Stearns. Someone bought a shitload of puts in Bear, and then someone sold a shitload of Bear shares that never got delivered. Bear then staggered forward, bleeding from every internal organ, and fell on its face. "It looks to me like Bear Stearns got riddled with bullets," John Welborn, an economist with an investment firm called the Haverford Group, later observed.

So who conducted the naked short- selling against Bear? We don't know — but we do know that, thanks to the free pass the SEC gave them, Prime Brokers stood to profit from the transactions. And the confidential meeting at the Fed on March 11th included all the major Prime Brokers on Wall Street — as well as many of the biggest hedge funds, who also happen to be some of the biggest short-sellers on Wall Street.

The economy's financial woes might have ended there — leaving behind an unsolved murder in which many of the prime suspects profited handsomely. But three months later, the killers struck again. On June 27th, 2008, an avalanche of undelivered shares in Lehman Brothers started piling up in the market. June 27th: 705,103 fails. June 30th: 814,870 fails. July 1st: 1,556,301 fails.

Then the rumors started. A story circulated on June 30th about Barclays buying Lehman for 25 percent less than the share price. The tale was quickly debunked, but the attacks continued, with hundreds of thousands of failed trades every day for more than a week — during which time Lehman lost 44 percent of its share price. The major players on Wall Street, who for years had confined this unseemly sort of insider rape to smaller companies, had begun to eat each other alive.

It made great capitalist sense to attack these giant firms — they were easy targets, after all, hideously mismanaged and engorged with debt — but an all-out shooting war of this magnitude posed a risk to everyone. And so a cease-fire was declared. In a remarkable order issued on July 15th, Cox dictated that short-sellers must actually pre-borrow shares before they sell them. But in a hilarious catch, the order only covered shares of the 19 biggest firms on Wall Street, including Morgan Stanley and Goldman Sachs, and would last only a month.

This was one of the most amazing regulatory actions ever: It essentially told Wall Street that it was enjoined from counterfeiting stock — but only temporarily, and only the stock of the 19 of the richest companies on Wall Street. Not surprisingly, the share price for Lehman and some of the other lucky robber barons surged on the news.

But the relief was short-lived. On August 12th, 2008, the Cox order expired — and fails in Lehman stock quickly started mounting. The attack spiked on September 9th, when there were over 1 million undelivered shares in Lehman. On September 10th, there were 5,877,649 failed trades. The day after, there were an astonishing 22,625,385 fails. The next day: 32,877,794. Then, on September 15th, the price of Lehman Brothers stock fell to 21 cents, and the company declared bankruptcy.

That naked shorting was the tool used to kill the company — which was, like Bear, a giant bursting sausage of deadly subprime deals that didn't need much of a push off the cliff — was obvious to everyone. Lehman CEO Richard Fuld, admittedly one of the biggest assholes of the 21st century, said as much a month later. "The naked shorts and rumormongers succeeded in bringing down Bear Stearns," Fuld told Congress. "And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers."

The methods used to destroy these companies pointed to widespread and extravagant market manipulation, and the death of Lehman should have instigated a full-bore investigation. "This isn't a trail of bread crumbs," former SEC enforcement director Irving Pollack has pointed out. "This audit trail is lit up like an airport runway. You can see it a mile off. Subpoena e-mails. Find out who spread false rumors and also shorted the stock, and you've got your manipulators."

It would be an easy matter for the SEC to determine who killed Bear and Lehman, if it wanted to — all it has to do is look at the trading data maintained by the stock exchanges. But 18 months after the widespread market manipulation, the federal government's cop on the financial beat has barely lifted a finger to solve the two biggest murders in Wall Street history. The SEC refuses to comment on what, if anything, it is doing to identify the wrongdoers, saying only that "investigations related to the financial crisis are a priority."

Watch Matt Taibbi break down short-selling vs. naked short-selling on his blog, Taibblog.

The commission did repeal the preposterous "market maker" loophole on September 18th, 2008, forbidding market makers from selling phantom shares. But that same day, the SEC also introduced a comical agreement called "Rule 10b-21," which makes it illegal for an Evil Hedge Fund to lie to a Prime Broker about where he borrowed his stock. Basically, this new rule formally exempted Wall Street's biggest players from any blame for naked short-selling, putting it all on the backs of their short-seller clients. Which was good news for firms like Goldman Sachs, which only a year earlier had been fined $2 million for repeatedly turning a blind eye to clients engaged in illegal short-selling. Instead of tracking down the murderers of Bear and Lehman, the SEC simply eliminated the law against aiding and abetting murder. "The new rule just exempted the Prime Brokers from legal responsibility," says a financial player who attended closed-door discussions about the regulation. "It's a joke."

But the SEC didn't stop there — it also went out of its way to protect the survivors from the normal functioning of the marketplace. On September 15th, the same day that Lehman declared bankruptcy, the share price of Goldman and Morgan Stanley began to plummet sharply. There was little evidence of phantom shares being sold — in Goldman's case, fewer than .02 percent of all trades failed. Whoever was attacking Goldman and Morgan Stanley — if anyone was — was for the most part doing it legally, through legitimate short-selling. As a result, when the SEC imposed yet another order on September 17th curbing naked short-selling, it did nothing to help either firm, whose share prices failed to recover.

Then something extraordinary happened. Morgan Stanley lobbied the SEC for a ban on legitimate short-selling of financial stocks — a thing not even the most ardent crusaders against naked short- selling, not even tinfoil-hat-wearing Patrick Byrne, had ever favored. "I spent years just trying to get the SEC to listen to a request that they stop people from rampant illegal counterfeiting of my company's stock," says Byrne. "But when Morgan Stanley asks for a ban on legal short-selling, they get it literally overnight."

Indeed, on September 19th, Cox imposed a temporary ban on legitimate short- selling of all financial stocks. The stock price of both Goldman and Morgan Stanley quickly rebounded. The companies were also bailed out by an instant designation as bank holding companies, which made them eligible for a boatload of emergency federal aid. The law required a five-day wait for such a conversion, but Geithner and the Fed granted Goldman and Morgan Stanley their new status overnight.

So who killed Bear Stearns and Lehman Brothers? Without a bust by the SEC, all that's left is means and motive. Everyone in Washington and on Wall Street understood what it meant when Lehman, for years the hated rival of Goldman Sachs, was chosen by Treasury Secretary Hank Paulson — the former Goldman CEO — to be the one firm that didn't get a federal bailout. "When Paulson, a former Goldman guy, chose to sacrifice Lehman, that's when you knew the whole f**king thing was dirty," says one Democratic Party operative. "That's like the Yankees not bailing out the Mets. It was just obvious."

The day of Lehman's collapse, Paulson also bullied Bank of America into buying Merrill Lynch — which left Goldman Sachs and Morgan Stanley as the only broker-teens left unaxed in the Camp Crystal Lake known as the American economy. Before they were hacked to bits, Merrill, Bear and Lehman all nurtured booming businesses as Prime Brokers. All that lucrative work had to go somewhere. So guess which firms made the most money in Prime Brokerage this year? According to a leading industry source, the top three were Goldman, JPMorgan and Morgan Stanley.

We may never know who killed Bear and Lehman. But it sure isn't hard to figure out who's left.

While naked short-selling was the weapon used to bring down both Bear and Lehman, it would be preposterous to argue that the practice caused the financial crisis. The most serious problems in this economy were the result of other, broader classes of financial misdeed: corruption of the ratings agencies, the use of smoke-and-mirrors like derivatives, an epidemic tulipomania called the housing boom and the overall decline of American industry, which pushed Wall Street to synthesize growth where none existed.

But the "phantom" shares produced by naked short-sellers are symptomatic of a problem that goes far beyond the stock market. "The only reason people talk about naked shorting so much is that stock is sexy and so much attention is paid to the stock market," says a former investment executive. "This goes on in all the markets."

Take the commodities markets, where most of those betting on the prices of things like oil, wheat and soybeans have no product to actually deliver. "All speculative selling of commodity futures is 'naked' short selling," says Adam White, director of research at White Knight Research and Trading. While buying things that don't actually exist isn't always harmful, it can help fuel speculative manias, like the oil bubble of last summer. "The world consumes 85 million barrels of oil per day, but it's not uncommon to trade 1 billion barrels per day on the various commodities exchanges," says White. "So you've got 12 paper barrels trading for every physical barrel."

The same is true for mortgages. When lenders couldn't find enough dope addicts to lend mansions to, some simply went ahead and started selling the same mortgages over and over to different investors. There are now a growing number of cases of such double-selling of mortgages: "It makes Bernie Madoff seem like chump change," says April Charney, a legal-aid attorney based in Florida. Just like in the stock market, where short-sellers delivered IOUs instead of real shares, traders of mortgage-backed securities sometimes conclude deals by transferring "lost-note affidavits" — basically a "my dog ate the mortgage" note — instead of the actual mortgage. A paper presented at the American Bankruptcy Institute earlier this year reports that up to a third of all notes for mortgage-backed securities may have been "misplaced or lost" — meaning they're backed by IOUs instead of actual mortgages.

How about bonds? "Naked short-selling of stocks is nothing compared to what goes on in the bond market," says Trimbath, the former DTC staffer. Indeed, the practice of selling bonds without delivering them is so rampant it has even infected the market for U.S. Treasury notes. That's right — Wall Street has actually been brazen enough to counterfeit the debt of the United States government right under the eyes of regulators, in the middle of a historic series of government bailouts! In fact, the amount of failed trades in Treasury bonds — the equivalent of "phantom" stocks — has doubled since 2007. In a single week last July, some $250 billion worth of U.S. Treasury bonds were sold and not delivered.

The counterfeit nature of our economy is troubling enough, given that financial power is concentrated in the hands of a few key players — "300 white guys in Manhattan," as a former high-placed executive puts it. But over the course of the past year, that group of insiders has also proved itself brilliantly capable of enlisting the power of the state to help along the process of concentrating economic might — making it less and less likely that the financial markets will ever be policed, since the state is increasingly the captive of these interests.

The new president for whom we all had such high hopes went and hired Michael Froman, a Citigroup executive who accepted a $2.2 million bonus after he joined the White House, to serve on his economic transition team — at the same time the government was giving Citigroup a massive bailout. Then, after promising to curb the influence of lobbyists, Obama hired a former Goldman Sachs lobbyist, Mark Patterson, as chief of staff at the Treasury. He hired another Goldmanite, Gary Gensler, to police the commodities markets. He handed control of the Treasury and Federal Reserve over to Geithner and Bernanke, a pair of stooges who spent their whole careers being bellhops for New York bankers. And on the first anniversary of the collapse of Lehman Brothers, when he finally came to Wall Street to promote "serious financial reform," his plan proved to be so completely absent of balls that the share prices of the major banks soared at the news.

The nation's largest financial players are able to write the rules for own their businesses and brazenly steal billions under the noses of regulators, and nothing is done about it. A thing so fundamental to civilized society as the integrity of a stock, or a mortgage note, or even a U.S. Treasury bond, can no longer be protected, not even in a crisis, and a crime as vulgar and conspicuous as counterfeiting can take place on a systematic level for years without being stopped, even after it begins to affect the modern-day equivalents of the Rockefellers and the Carnegies. What 10 years ago was a cheap stock-fraud scheme for second-rate grifters in Brooklyn has become a major profit center for Wall Street. Our burglar class now rules the national economy. And no one is trying to stop them.

[From Issue 1089 — October 15, 2009]

www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle/1

ty aquila

[sandi66]

Goldman Aims to Win Back Public, Reports Say
October 15, 2009 , 6:30 am Apparently, it takes a concerted effort to overcome an epithet like the one Rolling Stone political reporter Matt Taibbi dished out when he called Goldman Sachs a “great vampire squid wrapped around the face of humanity.”

The Wall Street Journal reported that Goldman, which announced Thursday that it has booked billions of dollars in quarterly profit and is on track to set aside set aside record pay this year for its employees, and chief executive, Lloyd C. Blankfein, have been mounting a charm offensive that they hope will assuage critics and make the firm’s rich bonuses go down easier with the public.
Executives at the bank, which is on pace to top 2007’s record $20.12 billion in compensation, have discussed increasing charitable contributions by the firm, The Journal said, citing people familiar with the situation.

Bloomberg News, meanwhile, reported that Goldman is not only considering a new charitable program, but has been working with the philanthropy consulting and recruiting firm Bridgespan Group on setting up such a scheme.

Goldman spokesman Lucas van Praag told the newspaper that the campaign is a necessary response to the misperceptions swirling around the bank, which has fared significantly better than its rivals since the onset of the financial crisis.

“In a world that seems to have turned upside down, where virtues are viewed as vices,” Mr. van Praag told The Journal, “it is important we explain our business model to a wider audience, why what we do matters and why and how we pay our people.”

However, it appears that not all the bank’s critics are buying into the idea that giving money to charities will overshadow record bonuses at a firm that received $10 billion in government bailout money.

“Surely there are extraordinarily important uses of capital in a capital-constrained society that they might consider rather than just paying themselves sums beyond the dreams of avarice,” Ben W. Heineman Jr., a former senior vice president for law and public affairs at General Electric, told Bloomberg News.

Luigi Zingales, a finance professor at the University of Chicago Booth School of Business, meanwhile, put it more bluntly, likening the move to “putting lipstick on a pig,” The Journal said.

dealbook.blogs.nytimes.com/2009/10/15/goldman-aims-to-win-back-public-reports-say/

[sandi66]

Goldman Can Spare You a Dime

FRANK RICH
Published: October 17, 2009

AT the dawn of the progressive era early in the last century, muckrakers attacked the first billionaire, John D. Rockefeller, for creating capitalism’s most ruthless monster. “The Octopus” was their nickname for Standard Oil, the trust that controlled nearly 90 percent of American oil. But even in that primordial phase of the industrial era, Rockefeller was mindful of his public image and eager to counter it. “His great brainstorm,” writes his biographer, Ron Chernow, “was undoubtedly his decision to dispense shiny souvenir dimes to adults and nickels to children as he moved about.” Who could hate an octopus tossing glittering coins?

It was hard not to think of Rockefeller’s old P.R. playbook while watching Goldman Sachs’s behavior when the Dow hit 10,000 last week. As leader of the Wall Street pack, Goldman declared surging profits, keeping it on track to dispense a record $23 billion in bonuses for 2009. But most Americans know all too well that only the intervention of billions of dollars in taxpayer bailout money saved Goldman from the dire fate of its less well-connected competitors. The growing ranks of under-and-unemployed Americans, meanwhile, are waiting with increasing desperation for a recovery of their own.

Goldman is this century’s octopus — almost literally so. The most-quoted sentence in financial journalism this year, by Matt Taibbi of Rolling Stone, describes the company as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” That’s why Goldman’s chief executive, Lloyd Blankfein, recycled Rockefeller’s stunt last week: The announcement of Goldman’s spectacular third-quarter earnings ($3.19 billion) was paired with the news that the company was donating $200 million to its own foundation, which promotes education. In Goldman dollars, that largess is roughly comparable to the nickels John D. handed out to children a century ago. At least those kids could spend the spare change on candy.

Teddy Roosevelt’s trust-busting crusade ultimately broke up Standard Oil. Though Goldman did outlast three of its four major rival firms during last fall’s meltdown, it is not a monopoly. And there is one other significant way that our 21st-century vampire squid differs from Rockefeller’s 20th-century octopus. Americans knew what oil was, and they understood how Standard Oil’s manipulations directly affected their pocketbooks. Even now many Americans don’t know what Goldman’s products are or how it makes its money. The less we know, the easier it is for reckless gambling to return to capitalism’s casino, and for Washington to look the other way as a new financial bubble inflates.

As Wall Street was celebrating last week, Congress was having a big week of its own, arousing itself to belatedly battle some of the corporate suspects that have helped drive America into its fiscal ditch. The big action was at the Senate Finance Committee, which finally produced a health care bill that, however gingerly, bids to reform industries that have feasted on the nation’s Rube Goldberg medical system. At least health care, like oil, is palpable, so we will be able to keep score of how reform fares — win, lose or draw. But the business of Wall Street, while also at center stage in a Congressional committee last week, is so esoteric that the public is understandably clueless as to what, if anything, the lawmakers were up to, if anyone even noticed at all.

The first stab at corrective legislation emerging from Barney Frank’s Financial Services Committee in the House is porous. While unregulated derivatives remain the biggest potential systemic threat to the world’s economy, Frank said that “the great majority” of businesses that use derivatives would not be covered under his committee’s much-amended bill. It’s also an open question whether the administration’s proposed consumer agency to protect Americans from mortgage and credit-card outrages will survive the banking lobby’s attempts to eviscerate it. As that bill stands now, more than 98 percent of America’s banks — mainly community banks, representing 20 percent of deposits — would be shielded from the new agency’s supervision.

If it’s too early to pronounce these embryonic efforts at financial reform a failure, it’s hard to muster great hope. As the economics commentator Jeff Madrick points out in The New York Review of Books, the American public is still owed “a clear account of the financial events of the last two years and of who, if anyone, is seriously to blame.” Without that, there will be neither the comprehensive policy framework nor the political will to change anything.

The only investigation in town is a bipartisan Financial Crisis Inquiry Commission created by Congress in May. It is still hiring staff. Its 10 members are dispersed throughout the country, and, according to a spokeswoman, have contemplated only a half-dozen public sessions over the next year. Such a panel, led by the former California state treasurer Phil Angelides, seems highly unlikely to match Congress’s Depression-era Pecora commission. That investigation was driven by a prosecutor whose relentless fact-finding riveted the country and gave birth to the Securities and Exchange Commission, among other New Deal reforms. Last week, we learned that the current S.E.C. has hired a former Goldman hand as the chief operating officer of its enforcement unit.

Even as we wait for Congress and its inquiry to produce results, the cultural toxins revealed by our economic crisis remain unaddressed by the leaders in the private and public sectors who might make a difference now. Blankfein may be giving $200 million to “education,” but Goldman is back to business as usual: making money by high-risk gambling, with all the advantages that the best connections, cheap loans from the Fed and high-speed trading algorithms can bring. As the Reuters columnist Rolfe Winkler wrote last week, “Main Street still owns much of the risk while Wall Street gets all of the profit.”

The idea of investing in the real economy — the one that might create jobs for Americans — remains outré in this culture. Credit to small businesses remains tight. The holy capitalist grail is still the speculative buying and selling of companies and the concoction of ever more esoteric financial “instruments.” The tragic tale of Simmons Bedding recently told in The Times is a role model. This successful 133-year-old manufacturing enterprise was flipped seven times in two decades by private equity firms. Investors made more than $750 million in profits even as the pile-up of debt pushed Simmons into bankruptcy, costing a quarter of its loyal workers their jobs so far.

Most leaders in America are against this kind of ethos in principle. Last month the president of Harvard, Drew Gilpin Faust, contributed a stirring essay to The Times regretting that educational institutions did not make stronger efforts to assert the fundamental values of pure intellectual inquiry while “the world indulged in a bubble of false prosperity and excessive materialism.” She rued the rise of business as the most popular undergraduate major, an implicit reference to the go-go atmosphere during the reign of her predecessor, Lawrence Summers, now President Obama’s chief economic adviser.

What went unsaid, of course, is that some of Harvard’s most prominent alumni of the pre-Faust era — Summers, Blankfein, Robert Rubin et al. — were major players during the last two bubbles. As coincidence would have it, the same edition of The Times that published Faust’s essay also included an article about how Harvard was scrounging for bucks by licensing a line of overpriced preppy clothing under the brand Harvard Yard. This sop to excessive materialism will be a scant recompense for the $11 billion Harvard’s endowment managers lost in their own bad gamble on interest-rate swaps.

Obama has also passed through Harvard. (Disclosure: so did I.) He too has consistently said all the right things about the “money culture” of “quick kills and bloated bonuses,” of “reckless behavior and unchecked excess.” But the air of entitlement that continues to waft from his administration sends another message.

In particular, the tone-deaf Treasury secretary, Timothy Geithner, never ceases to amaze. His daily calendars reveal that most of his contacts with the financial sector in the first seven months of 2009 were limited to the trinity of Goldman Sachs, Citigroup and JPMorgan. And last week Bloomberg News reported that his inner circle of “counselors” — key advisers who, conveniently enough, do not require Senate confirmation — are largely drawn from the same club. It’s hard to see how any public official can challenge a culture that he is marinating in, night and day.

Those Obama fans who are disappointed keep looking for explanations. Is he too impressed by the elite he met in Cambridge, too eager to split the difference between left and right, too willing to compromise? As he pursues legislation, why does he keep deferring to others — whether to his party’s Congressional leaders or the Congressional Budget Office or to this month’s acting president, Olympia Snowe? Why doesn’t he ever draw a line in the sand? “We know Obama has good values,” Jeff Madrick said to me last week, “but we don’t know if he has convictions.”

What we also know is that if Teddy Roosevelt palled around with John D. Rockefeller as today’s political class does with Wall Street’s titans and lobbyists, the tentacles of the original octopus would still be coiled tightly around America’s neck.

www.nytimes.com/2009/10/18/opinion/18rich.html?em

[sandi66]

Goldman, Can Spare You a Dime?
October 19, 2009 , 4:49 am At the dawn of the progressive era early in the last century, muckrakers attacked the first billionaire, John D. Rockefeller, for creating capitalism’s most ruthless monster. “The Octopus” was their nickname for Standard Oil, the trust that controlled nearly 90 percent of American oil. But even in that primordial phase of the industrial era, Mr. Rockefeller was mindful of his public image and eager to counter it, The New York Times’s Frank Rich writes. “His great brainstorm,” writes his biographer, Ron Chernow, “was undoubtedly his decision to dispense shiny souvenir dimes to adults and nickels to children as he moved about.” Who could hate an octopus tossing glittering coins?

It was hard not to think of Mr. Rockefeller’s old P.R. playbook while watching Goldman Sachs’s behavior when the Dow hit 10,000 last week, Mr. Rich says.
As leader of the Wall Street pack, Goldman declared surging profits, keeping it on track to dispense a record $23 billion in bonuses for 2009. But most Americans know all too well that only the intervention of billions of dollars in taxpayer bailout money saved Goldman from the dire fate of its less well-connected competitors. The growing ranks of under-and-unemployed Americans, meanwhile, are waiting with increasing desperation for a recovery of their own.

Goldman is this century’s octopus — almost literally so, Mr. Rich says. The most-quoted sentence in financial journalism this year, by Matt Taibbi of Rolling Stone, describes the company as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” That’s why Goldman’s chief executive, Lloyd Blankfein, recycled Rockefeller’s stunt last week: The announcement of Goldman’s spectacular third-quarter earnings ($3.19 billion) was paired with the news that the company was donating $200 million to its own foundation, which promotes education. In Goldman dollars, that largess is roughly comparable to the nickels John D. handed out to children a century ago, according to Mr. Rich. At least those kids, he says, could spend the spare change on candy.

Teddy Roosevelt’s trust-busting crusade ultimately broke up Standard Oil. Though Goldman did outlast three of its four major rival firms during last fall’s meltdown, it is not a monopoly. And there is one other significant way that our 21st-century vampire squid differs from Rockefeller’s 20th-century octopus, Mr. Rich notes. Americans knew what oil was, and they understood how Standard Oil’s manipulations directly affected their pocketbooks. Even now many Americans don’t know what Goldman’s products are or how it makes its money. The less we know, the easier it is for reckless gambling to return to capitalism’s casino, and for Washington to look the other way as a new financial bubble inflates, Mr. Rich argues.

As Wall Street was celebrating last week, Congress was having a big week of its own, arousing itself to belatedly battle some of the corporate suspects that have helped drive America into its fiscal ditch. The big action was at the Senate Finance Committee, which finally produced a health care bill that, however gingerly, bids to reform industries that have feasted on the nation’s Rube Goldberg medical system. At least health care, like oil, is palpable, so we will be able to keep score of how reform fares — win, lose or draw. But, Mr. Rich says, the business of Wall Street, while also at center stage in a Congressional committee last week, is so esoteric that the public is understandably clueless as to what, if anything, the lawmakers were up to, if anyone even noticed at all.

The first stab at corrective legislation emerging from Barney Frank’s Financial Services Committee in the House is porous, Mr. Rich suggests. While unregulated derivatives remain the biggest potential systemic threat to the world’s economy, Mr. Frank said that “the great majority” of businesses that use derivatives would not be covered under his committee’s much-amended bill. It’s also an open question whether the administration’s proposed consumer agency to protect Americans from mortgage and credit-card outrages will survive the banking lobby’s attempts to eviscerate it. As that bill stands now, more than 98 percent of America’s banks — mainly community banks, representing 20 percent of deposits — would be shielded from the new agency’s supervision, Mr. Rich notes.

If it’s too early to pronounce these embryonic efforts at financial reform a failure, it’s hard to muster great hope, Mr. Rich says. As the economics commentator Jeff Madrick points out in The New York Review of Books, the American public is still owed “a clear account of the financial events of the last two years and of who, if anyone, is seriously to blame.” Without that, there will be neither the comprehensive policy framework nor the political will to change anything, Mr Rich argues.

The only investigation in town is a bipartisan Financial Crisis Inquiry Commission created by Congress in May, the columnist says. It is still hiring staff. Its 10 members are dispersed throughout the country, and, according to a spokeswoman, have contemplated only a half-dozen public sessions over the next year. Such a panel, led by the former California state treasurer Phil Angelides, seems highly unlikely to match Congress’s Depression-era Pecora commission, according Mr. Rich. That investigation was driven by a prosecutor whose relentless fact-finding riveted the country and gave birth to the Securities and Exchange Commission, among other New Deal reforms. Last week, we learned that the current S.E.C. has hired a former Goldman hand as the chief operating officer of its enforcement unit.

Even as we wait for Congress and its inquiry to produce results, the cultural toxins revealed by our economic crisis remain unaddressed by the leaders in the private and public sectors who might make a difference now, Mr. Rich argues. Mr. Blankfein may be giving $200 million to “education,” but Goldman is back to business as usual: making money by high-risk gambling, with all the advantages that the best connections, cheap loans from the Fed and high-speed trading algorithms can bring. As the Reuters columnist Rolfe Winkler wrote last week, “Main Street still owns much of the risk while Wall Street gets all of the profit.”

The idea of investing in the real economy — the one that might create jobs for Americans — remains outré in this culture, Mr. Rich says. Credit to small businesses remains tight. The holy capitalist grail is still the speculative buying and selling of companies and the concoction of ever more esoteric financial “instruments.” The tragic tale of Simmons Bedding recently told in The Times is a role model, Mr. Rich suggests. This successful 133-year-old manufacturing enterprise was flipped seven times in two decades by private equity firms. Investors made more than $750 million in profits even as the pile-up of debt pushed Simmons into bankruptcy, costing a quarter of its loyal workers their jobs so far.

Most leaders in America are against this kind of ethos in principle, Mr. Rich says. Last month the president of Harvard, Drew Gilpin Faust, contributed a stirring essay to The Times regretting that educational institutions did not make stronger efforts to assert the fundamental values of pure intellectual inquiry while “the world indulged in a bubble of false prosperity and excessive materialism.” She rued the rise of business as the most popular undergraduate major, an implicit reference to the go-go atmosphere during the reign of her predecessor, Lawrence Summers, now President Obama’s chief economic adviser.

What went unsaid, of course, is that some of Harvard’s most prominent alumni of the pre-Faust era — Summers, Blankfein, Robert Rubin et al. — were major players during the last two bubbles, Mr. Rich notes. As coincidence would have it, the same edition of The Times that published Faust’s essay also included an article about how Harvard was scrounging for bucks by licensing a line of overpriced preppy clothing under the brand Harvard Yard. This sop to excessive materialism will be a scant recompense for the $11 billion Harvard’s endowment managers lost in their own bad gamble on interest-rate swaps, Mr. Rich argues.

Obama has also passed through Harvard. (Disclosure: so did Mr. Rich.) He too has consistently said all the right things about the “money culture” of “quick kills and bloated bonuses,” of “reckless behavior and unchecked excess.” But the air of entitlement that continues to waft from his administration sends another message, according to Mr. Rich.

In particular, the tone-deaf Treasury secretary, Timothy Geithner, never ceases to amaze. His daily calendars reveal that most of his contacts with the financial sector in the first seven months of 2009 were limited to the trinity of Goldman Sachs, Citigroup and JPMorgan. And last week Bloomberg News reported that his inner circle of “counselors” — key advisers who, conveniently enough, do not require Senate confirmation — are largely drawn from the same club. It’s hard to see how any public official can challenge a culture that he is marinating in, night and day, Mr. Rich says.

Those Obama fans who are disappointed keep looking for explanations. Is he too impressed by the elite he met in Cambridge, too eager to split the difference between left and right, too willing to compromise? As he pursues legislation, why does he keep deferring to others — whether to his party’s Congressional leaders or the Congressional Budget Office or to this month’s acting president, Olympia Snowe? Why doesn’t he ever draw a line in the sand? “We know Obama has good values,” Jeff Madrick said to me last week, “but we don’t know if he has convictions.”

What we also know, Mr. Rich says, is that if Teddy Roosevelt palled around with John D. Rockefeller as today’s political class does with Wall Street’s titans and lobbyists, the tentacles of the original octopus would still be coiled tightly around America’s neck.

dealbook.blogs.nytimes.com/2009/10/19/goldman-can-spare-you-a-dime/

[sandi66]

Wall Street's Bailout Hustle

Goldman Sachs and other big banks aren't just pocketing the trillions we gave them to rescue the economy - they're re-creating the conditions for another crash

MATT TAIBBIPosted Feb 17, 2010 5:57 AM

On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America's pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman's role in precipitating the global financial crisis.

NOTE: This is a 7 page article... it contains some pretty strong language, therefore, will not post here, but you can read from the link below.

www.rollingstone.com/politics/story/32255149/wall_streets_bailout_hustle/1



ty luckieeguy

[sandi66]

Matt Taibbi: Courts Helping Banks Screw Over Homeowners

Retired judges are rushing through complex cases to speed foreclosures in Florida

By Matt Taibbi
Nov 10, 2010 2:25 PM EST

The following is an article from the November 25, 2010 issue of Rolling Stone. This issue is available Friday on newsstands, as well online in Rolling Stone’s digital archive. Click here to subscribe.

The foreclosure lawyers down in Jacksonville had warned me, but I was skeptical. They told me the state of Florida had created a special super-high-speed housing court with a specific mandate to rubber-stamp the legally dicey foreclosures by corporate mortgage pushers like Deutsche Bank and JP Morgan Chase. This "rocket docket," as it is called in town, is presided over by retired judges who seem to have no clue about the insanely complex financial instruments they are ruling on — securitized mortgages and laby­rinthine derivative deals of a type that didn't even exist when most of them were active members of the bench. Their stated mission isn't to decide right and wrong, but to clear cases and blast human beings out of their homes with ultimate velocity. They certainly have no incentive to penetrate the profound criminal mysteries of the great American mortgage bubble of the 2000s, perhaps the most complex Ponzi scheme in human history — an epic mountain range of corporate fraud in which Wall Street megabanks conspired first to collect huge numbers of subprime mortgages, then to unload them on unsuspecting third parties like pensions, trade unions and insurance companies (and, ultimately, you and me, as taxpayers) in the guise of AAA-rated investments. Selling lead as gold, shit as Chanel No. 5, was the essence of the booming international fraud scheme that created most all of these now-failing home mortgages.

The Real Reason America’s Cities and Towns Are Broke

The rocket docket wasn't created to investigate any of that. It exists to launder the crime and bury the evidence by speeding thousands of fraudulent and predatory loans to the ends of their life cycles, so that the houses attached to them can be sold again with clean paperwork. The judges, in fact, openly admit that their primary mission is not justice but speed. One Jacksonville judge, the Honorable A.C. Soud, even told a local newspaper that his goal is to resolve 25 cases per hour. Given the way the system is rigged, that means His Honor could well be throwing one ass on the street every 2.4 minutes.

Exclusive Excerpt: America on Sale, From Matt Taibbi's Griftopia

Foreclosure lawyers told me one other thing about the rocket docket. The hearings, they said, aren't exactly public. "The judges might give you a hard time about watching," one lawyer warned. "They're not exactly anxious for people to know about this stuff." Inwardly, I laughed at this — it sounded like typical activist paranoia. The notion that a judge would try to prevent any citizen, much less a member of the media, from watching an open civil hearing sounded ridiculous. f**ked-up as everyone knows the state of Florida is, it couldn't be that bad. It isn't Indonesia. Right?

Well, not quite. When I went to sit in on Judge Soud's courtroom in downtown Jacksonville, I was treated to an intimate, and at times breathtaking, education in the horror of the foreclosure crisis, which is rapidly emerging as the even scarier sequel to the financial meltdown of 2008: Invasion of the Home Snatchers II. In Las Vegas, one in 25 homes is now in foreclosure. In Fort Myers, Florida, one in 35. In September, lenders nationwide took over a rec­ord 102,134 properties; that same month, more than a third of all home sales were distressed properties. All told, some 820,000 Americans have already lost their homes this year, and another 1 million currently face foreclosure.

Throughout the mounting catastrophe, however, many Americans have been slow to comprehend the true nature of the mortgage disaster. They seemed to have grasped just two things about the crisis: One, a lot of people are getting their houses foreclosed on. Two, some of the banks doing the foreclosing seem to have misplaced their paperwork.

Taibbi’s Takedown of ‘Vampire Squid’ Goldman Sachs

For most people, the former bit about homeowners not paying their d**n bills is the important part, while the latter, about the sudden and strange inability of the world's biggest and wealthiest banks to keep proper records, is incidental. Just a little office sloppiness, and who cares? Those deadbeat homeowners still owe the money, right? "They had it coming to them," is how a bartender at the Jacksonville airport put it to me.

But in reality, it's the unpaid bills that are incidental and the lost paperwork that matters. It turns out that underneath that little iceberg tip of exposed evidence lies a fraud so gigantic that it literally cannot be contemplated by our leaders, for fear of admitting that our entire financial system is corrupted to its core — with our great banks and even our government coffers backed not by real wealth but by vast landfills of deceptively generated and essentially worthless mortgage-backed assets.

You've heard of Too Big to Fail — the foreclosure crisis is Too Big for Fraud. Think of the Bernie Madoff scam, only replicated tens of thousands of times over, infecting every corner of the financial universe. The underlying crime is so pervasive, we simply can't admit to it — and so we are working feverishly to rubber-stamp the problem away, in sordid little backrooms in cities like Jacksonville, behind doors that shouldn't be, but often are, closed.

Matt Taibbi blogs on the Taibblog

And that's just the economic side of the story. The moral angle to the foreclosure crisis — and, of course, in capitalism we're not supposed to be concerned with the moral stuff, but let's mention it anyway — shows a culture that is slowly giving in to a futuristic nightmare ideology of computerized greed and unchecked financial violence. The monster in the foreclosure crisis has no face and no brain. The mortgages that are being foreclosed upon have no real owners. The lawyers bringing the cases to evict the humans have no real clients. It is complete and absolute legal and economic chaos. No single limb of this vast man-­eating thing knows what the other is doing, which makes it nearly impossible to combat — and scary as hell to watch.

What follows is an account of a single hour of Judge A.C. Soud's rocket docket in Jacksonville. Like everything else related to the modern economy, these foreclosure hearings are conducted in what is essentially a foreign language, heavy on jargon and impenetrable to the casual observer. It took days of interviews with experts before and after this hearing to make sense of this single hour of courtroom drama. And though the permutations of small-time scammery and grift in the foreclosure world are virtually endless — your average foreclosure case involves homeowners or investors being screwed at least five or six creative ways — a single hour of court and a few cases is enough to tell the main story. Because if you see one of these scams, you see them all.

It's early on a sunny Tuesday morning when I arrive at the chambers of Judge Soud, one of four rotating judges who preside over the local rocket docket. These special foreclosure courts were established in July of this year, after the state of Florida budgeted $9.6 million to create a new court with a specific mandate to clear 62 percent of the foreclosure cases that were clogging up the system. Rather than forcing active judges to hear thousands of individual cases, this strategy relies on retired judges who take turns churning through dozens of cases every morning, with little time to pay much attention to the particulars.

What passes for a foreclosure court in Jacksonville is actually a small conference room at the end of a hall on the fifth floor of the drab brick Duval County Courthouse. The space would just about fit a fridge and a pingpong table. At the head of a modest conference table this morning sits Judge Soud, a small and fussy-looking man who reminds me vaguely of the actor Ben Gazzara.

On one side of the table sits James Kowalski, a former homicide prosecutor who is now defending homeowners. A stern man with a shaved head and a laconic manner of speaking, Kowalski has helped pioneer a whole new approach to the housing mess, slowing down the mindless eviction machine by deposing the scores of "robo-signers" being hired by the banks to sign phony foreclosure affidavits by the thousands. For his work on behalf of the dispossessed, Kowalski was recently profiled in a preposterous Wall Street Journal article that blamed attorneys like him for causing the foreclosure mess with their nuisance defense claims. The headline: "Niche Lawyers Spawned Housing Fracas."

On the other side of the table are the plaintiff's attorneys, the guys who represent the banks. On this level of the game, these lawyers refer to themselves as "bench warmers" — volume stand-ins subcontracted by the big, hired-killer law firms that work for the banks. One of the bench warmers present today is Mark Kessler, who works for a number of lenders and giant "foreclosure mills," including the one run by David J. Stern, a gazillionaire attorney and all-Universe asshole who last year tried to foreclose on 70,382 homeowners. Which is a nice way to make a living, considering that Stern and his wife, Jeanine, have bought nearly $60 million in property for themselves in recent years, including a 9,273-square-foot manse in Fort Lauderdale that is part of a Ritz-Carlton complex.

Kessler is a harried, middle-aged man in glasses who spends the morning perpetually fighting to organize a towering stack of folders, each one representing a soon-to-be-homeless human being. It quickly becomes apparent that Kessler is barely acquainted with the names in the files, much less the details of each case. "A lot of these guys won't even get the folders until right before the hearing," says Kowalski.

When I arrive, Judge Soud and the lawyers are already arguing a foreclosure case; at a break in the action, I slip into the chamber with a legal-aid attorney who's accompanying me and sit down. The judge eyes me anxiously, then proceeds. He clears his throat, and then it's ready, set, fraud!

Judge Soud seems to have no clue that the files he is processing at a breakneck pace are stuffed with fraudulent claims and outright lies. "We have not encountered any fraud yet," he recently told a local newspaper. "If we encountered fraud, it would go to [the state attorney], I can tell you that." But the very first case I see in his court is riddled with fraud.

Kowalski has seen hundreds of cases like the one he's presenting this morning. It started back in 2006, when he went to Pennsylvania to conduct what he thought would be a routine deposition of an official at the lending giant GMAC. What he discovered was that the official — who had sworn to having personal knowledge of the case — was, in fact, just a "robo-signer" who had signed off on the file without knowing anything about the actual homeowner or his payment history. (Kowalski's clients, like most of the homeowners he represents, were actually making their payments on time; in this particular case, a check had been mistakenly refused by GMAC.) Following the evidence, Kowalski discovered what has turned out to be a systemwide collapse of the process for documenting mortgages in this country.

If you're foreclosing on somebody's house, you are required by law to have a collection of paperwork showing the journey of that mortgage note from the moment of issuance to the present. You should see the originating lender (a firm like Countrywide) selling the loan to the next entity in the chain (perhaps Goldman Sachs) to the next (maybe JP Morgan), with the actual note being transferred each time. But in fact, almost no bank currently foreclosing on homeowners has a reliable record of who owns the loan; in some cases, they have even intentionally shredded the actual mortgage notes. That's where the robo-signers come in. To create the appearance of paperwork where none exists, the banks drag in these pimply entry-level types — an infamous example is GMAC's notorious robo-signer Jeffrey Stephan, who appears online looking like an age-advanced photo of Beavis or Butt-Head — and get them to sign thousands of documents a month attesting to the banks' proper ownership of the mortgages.

This isn't some rare goof-up by a low-level cubicle slave: Virtually every case of foreclosure in this country involves some form of screwed-up paperwork. "I would say it's pretty close to 100 percent," says Kowalski. An attorney for Jacksonville Area Legal Aid tells me that out of the hundreds of cases she has handled, fewer than five involved no phony paperwork. "The fraud is the norm," she says.

Kowalski's current case before Judge Soud is a perfect example. The Jacksonville couple he represents are being sued for delinquent payments, but the case against them has already been dismissed once before. The first time around, the plaintiff, Bank of New York Mellon, wrote in Paragraph 8 that "plaintiff owns and holds the note" on the house belonging to the couple. But in Paragraph 3 of the same complaint, the bank reported that the note was "lost or destroyed," while in Paragraph 4 it attests that "plaintiff cannot reasonably obtain possession of the promissory note because its whereabouts cannot be determined."

The bank, in other words, tried to claim on paper, in court, that it both lost the note and had it, at the same time. Moreover, it claimed that it had included a copy of the note in the file, which it did — the only problem being that the note (a) was not properly endorsed, and (b) was payable not to Bank of New York but to someone else, a company called Novastar.

Now, months after its first pass at foreclosure was dismissed, the bank has refiled the case — and what do you know, it suddenly found the note. And this time, somehow, the note has the proper stamps. "There's a stamp that did not appear on the note that was originally filed," Kowalski tells the judge. (This business about the stamps is hilarious. "You can get them very cheap online," says Chip Parker, an attorney who defends homeowners in Jacksonville.)

The bank's new set of papers also traces ownership of the loan from the original lender, Novastar, to JP Morgan and then to Bank of New York. The bank, in other words, is trying to push through a completely new set of documents in its attempts to foreclose on Kowalski's clients.

There's only one problem: The dates of the transfers are completely f**ked. According to the documents, JP Morgan transferred the mortgage to Bank of New York on December 9th, 2008. But according to the same documents, JP Morgan didn't even receive the mortgage from Novastar until February 2nd, 2009 — two months after it had supposedly passed the note along to Bank of New York. Such rank incompetence at doctoring legal paperwork is typical of foreclosure actions, where the fraud is laid out in ink in ways that make it impossible for anyone but an overburdened, half-asleep judge to miss. "That's my point about all of this," Kowalski tells me later. "If you're going to lie to me, at least lie well."

The dates aren't the only thing screwy about the new documents submitted by Bank of New York. Having failed in its earlier attempt to claim that it actually had the mortgage note, the bank now tries an all-of-the-above tactic. "Plaintiff owns and holds the note," it claims, "or is a person entitled to enforce the note."

Soud sighs. For Kessler, the plaintiff's lawyer, to come before him with such sloppy documents and make this preposterous argument — that his client either is or is not the note-holder — well, that puts His Honor in a tough spot. The entire concept is a legal absurdity, and he can't sign off on it. With an expression of something very like regret, the judge tells Kessler, "I'm going to have to go ahead and accept [Kowalski's] argument."

Now, one might think that after a bank makes multiple attempts to push phony documents through a courtroom, a judge might be pissed off enough to simply rule against that plaintiff for good. As I witness in court all morning, the defense never gets more than one chance to screw up. But the banks get to keep filing their foreclosures over and over again, no matter how atrocious and deceitful their paperwork is.

Thus, when Soud tells Kessler that he's dismissing the case, he hastens to add: "Of course, I'm not going to dismiss with prejudice." With an emphasis on the words "of course."

Instead, Soud gives Kessler 25 days to come up with better paperwork. Kowalski fully expects the bank to come back with new documents telling a whole new story of the note's ownership. "What they're going to do, I would predict, is produce a note and say Bank of New York is not the original note-holder, but merely the servicer," he says.

This is the dirty secret of the rocket docket: The whole system is set up to enable lenders to commit fraud over and over again, until they figure out a way to reduce the stink enough so some judge like Soud can sign off on the scam. "If the court finds for the defendant, the plaintiffs just refile," says Parker, the local attorney. "The only way for the caseload to get reduced is to give it to the plaintiff. The entire process is designed with that result in mind."

Now all of this — the obviously cooked-up documents, the magically appearing stamp and the rest of it — may just seem like nothing more than sloppy paperwork. After all, what does it matter if the bank has lost a few forms or mixed up the dates? The homeowners still owe what they owe, and the deadbeats have no right to keep living in a house they haven't paid for.

But what's going on at the Jacksonville rocket docket, and in foreclosure courts all across the country, has nothing to do with sloppiness. All this phony paperwork was actually an essential part of the mortgage bubble, an integral element of what has enabled the nation's biggest lenders to pass off all that subprime lead as AAA gold.

In the old days, when you took out a mortgage, it was probably through a local bank or a credit union, and whoever gave you your loan held on to it for life. If you lost your job or got too sick to work and suddenly had trouble making your payments, you could call a human being and work things out. It was in the banker's interest, as well as yours, to make a modified payment schedule. From his point of view, it was better that you pay something than nothing at all.

But that all changed about a decade ago, thanks to the invention of new financial instruments that magically turned all these mortgages into high-grade investments. Now when you took out a mortgage, your original lender — which might well have been a big mortgage mill like Countrywide or New Century — immediately sold off your loan to big banks like Deutsche and Goldman and JP Morgan. The banks then dumped hundreds or thousands of home loans at a time into tax-exempt real estate trusts, where the loans were diced up into securities, examined and graded by the ratings agencies, and sold off to big pension funds and other institutional suckers.

Even at this stage of the game, the banks generally knew that the loans they were buying and reselling to investors were shady. A company called Clayton Holdings, which analyzed nearly 1 million loans being prepared for sale in 2006 and 2007 by 23 banks, found that nearly half of the mortgages failed to meet the underwriting standards being promised to investors. Citi­group, for instance, had 29 percent of its loans come up short, but it still sold a third of those mortgages to investors. Goldman Sachs had 19 percent of its mortgages flunk the test, yet it knowingly hawked 34 percent of the risky deals to investors.

D. Keith Johnson, the head of Clayton Holdings, was so alarmed by the findings that he went to officials at three of the main ratings agencies — Moody's, Standard and Poor's, and Fitch's — and tried to get them to properly evaluate the loans. "Wouldn't this information be great for you to have as you assign risk levels?" he asked them. (Translation: Don't you ratings agencies want to know that half these loans are crap before you give them a thumbs-up?) But all three agencies rejected his advice, fearing they would lose business if they adopted tougher standards. In the end, the agencies gave large chunks of these mortgage-backed securities AAA ratings — which means "credit risk almost zero."

Since these mortgage-backed securities paid much higher returns than other AAA investments like treasury notes or corporate bonds, the banks had no trouble attracting investors, foreign and domestic, from pension funds to insurance companies to trade unions. The demand was so great, in fact, that they often sold mortgages they didn't even have yet, prompting big warehouse lenders like Countrywide and New Century to rush out into the world to find more warm bodies to lend to.

In their extreme haste to get thousands and thousands of mortgages they could resell to the banks, the lenders committed an astonishing variety of fraud, from falsifying income statements to making grossly inflated appraisals to misrepresenting properties to home buyers. Most crucially, they gave tons and tons of credit to people who probably didn't deserve it, and why not? These fly-by-night mortgage companies weren't going to hold on to these loans, not even for 10 minutes. They were issuing this credit specifically to sell the loans off to the big banks right away, in furtherance of the larger scheme to dump fraudulent AAA-rated mortgage-backed securities on investors. If you had a pulse, they had a house to sell you.

As bad as Countrywide and all those lenders were, the banks that had sent them out to collect these crap loans were a hundred times worse. To sell the loans, the banks often dumped them into big tax-exempt buckets called REMICs, or Real Estate Mortgage Investment Conduits. Each one of these Enron-ish, offshore-like real estate trusts spelled out exactly what kinds of loans were supposed to be in the pool, when they were to be collected, and how they were to be managed. In order to both preserve their tax-exempt status and deserve their AAA ratings, each of the loans in the pool had to have certain characteristics. The loans couldn't already be in default or foreclosure at the time they were sold to investors. If they were advertised as nice, safe, fixed-rate mortgages, they couldn't turn out to be high-interest junk loans. And, on the most basic level, the loans had to actually exist. In other words, if the trust stipulated that all the loans had to be collected by August 2005, the bank couldn't still be sticking in mortgages months later.

Yet that's exactly what the banks did. In one case handled by Jacksonville Area Legal Aid, a homeowner refinanced her house in 2005 but almost immediately got into trouble, going into default in December of that year. Yet somehow, this woman's loan was placed into a trust called Home Equity Loan Trust Series AE 2005-HE5 in January 2006 — five months after the deadline for that particular trust. The loan was not only late, it was already in foreclosure — which means that, by definition, whoever the investors were in AE 2005-HE5 were getting shafted.

Why does stuff like this matter? Because when the banks put these pools together, they were telling their investors that they were putting their money into tidy collections of real, performing home loans. But frequently, the loans in the trust were complete shit. Or sometimes, the banks didn't even have all the loans they said they had. But the banks sold the securities based on these pools of mortgages as AAA-rated gold anyway.

In short, all of this was a scam — and that's why so many of these mortgages lack a true paper trail. Had these transfers been done legally, the actual mortgage note and detailed information about all of these transactions would have been passed from entity to entity each time the mortgage was sold. But in actual practice, the banks were often committing securities fraud (because many of the mortgages did not match the information in the prospectuses given to investors) and tax fraud (because the way the mortgages were collected and serviced often violated the strict procedures governing such investments). Having unloaded this diseased cargo onto their unsuspecting customers, the banks had no incentive to waste money keeping "proper" documentation of all these dubious transactions.

"You've already committed fraud once," says April Charney, an attorney with Jacksonville Area Legal Aid. "What do you have to lose?"

Sitting in the rocket docket, James Kowalski considers himself lucky to have won his first motion of the morning. To get the usually intractable Judge Soud to forestall a foreclosure is considered a real victory, and I later hear Kowalski getting props and attaboys from other foreclosure lawyers. In a great deal of these cases, in fact, the homeowners would have a pretty good chance of beating the rap, at least temporarily, if only they had lawyers fighting for them in court. But most of them don't. In fact, more than 90 percent of the cases that go through Florida foreclosure courts are unopposed. Either homeowners don't know they can fight their foreclosures, or they simply can't afford an attorney. These unopposed cases are the ones the banks know they'll win — which is why they don't sweat it if they take the occasional whipping.

That's why all these colorful descriptions of cases where foreclosure lawyers like Kowalski score in court are really just that — a little color. The meat of the foreclosure crisis is the unopposed cases; that's where the banks make their money. They almost always win those cases, no matter what's in the files.

This becomes evident after Kowalski leaves the room.

"Who's next?" Judge Soud says. He turns to Mark Kessler, the counsel for the big foreclosure mills. "Mark, you still got some?"

"I've got about three more, Judge," says Kessler.

Kessler then drops three greenish-brown files in front of Judge Soud, who spends no more than a minute or two glancing through each one. Then he closes the files and puts an end to the process by putting his official stamp on each foreclosure with an authoritative finality:

Kerchunk!
Kerchunk!
Kerchunk!

Each one of those kerchunks means another family on the street. There are no faces involved here, just beat-the-clock legal machinery. Watching Judge Soud plow through each foreclosure reminds me of the scene in Fargo where the villain played by Swedish character actor Peter Stormare pushes his victim's leg through a wood chipper with that trademark bored look on his face. Mechanized misery and brainless bureaucracy on the one hand, cash for the banks on the other.

What's sad is that most Americans who have an opinion about the foreclosure crisis don't give a shit about all the fraud involved. They don't care that these mortgages wouldn't have been available in the first place if the banks hadn't found a way to sell oregano as weed to pension funds and insurance companies. They don't care that the Countrywides of the world pushed borrowers who qualified for safer fixed-­income loans into far more dangerous adjustable-rate loans, because their brokers got bigger commissions for doing so. They don't care that in the rush to produce loans, people were sold houses that turned out to have flood damage or worse, and they certainly don't care that people were sold houses with inflated appraisals, which left them almost immediately underwater once housing prices started falling.

The way the banks tell it, it doesn't matter if they defrauded homeowners and investors and taxpayers alike to get these loans. All that matters is that a bunch of deadbeats aren't paying their f**king bills. "If you didn't pay your mortgage, you shouldn't be in your house — period," is how Walter Todd, portfolio manager at Greenwood Capital Associates, puts it. "People are getting upset about something that's just procedural."

Jamie Dimon, the CEO of JP Morgan, is even more succinct in dismissing the struggling homeowners that he and the other megabanks scammed before tossing out into the street. "We're not evicting people who deserve to stay in their house," Dimon says.

There are two things wrong with this argument. (Well, more than two, actually, but let's just stick to the two big ones.)

The first reason is: It simply isn't true. Many people who are being foreclosed on have actually paid their bills and followed all the instructions laid down by their banks. In some cases, a homeowner contacts the bank to say that he's having trouble paying his bill, and the bank offers him loan modification. But the bank tells him that in order to qualify for modification, he must first be delinquent on his mortgage. "They actually tell people to stop paying their bills for three months," says Parker.

The authorization gets recorded in what's known as the bank's "contact data­base," which records every phone call or other communication with a home­owner. But no mention of it is entered into the bank's "number history," which records only the payment record. When the number history notes that the home­owner has missed three payments in a row, it has no way of knowing that the homeowner was given permission to stop making payments. "One computer generates a default letter," says Kowalski. "Another computer contacts the credit bureaus." At no time is there a human being looking at the entire picture.

Which means that homeowners can be foreclosed on for all sorts of faulty reasons: misplaced checks, address errors, you name it. This inability of one limb of the foreclosure beast to know what the other limb is doing is responsible for many of the horrific stories befalling homeowners across the country. Patti Parker, a local attorney in Jacksonville, tells of a woman whose home was seized by Deutsche Bank two days before Christmas. Months later, Deutsche came back and admitted that they had made a mistake: They had repossessed the wrong property. In another case that made headlines in Orlando, an agent for JP Morgan mistakenly broke into a woman's house that wasn't even in foreclosure and tried to change the locks. Terrified, the woman locked herself in her bathroom and called 911. But in a profound expression of the state's reflexive willingness to side with the bad guys, the police made no arrest in the case. Breaking and entering is not a crime, apparently, when it's authorized by a bank.

The second reason the whole they still owe the f**king money thing is bogus has to do with the changed incentives in the mortgage game. In many cases, banks like JP Morgan are merely the servicers of all these home loans, charged with collecting your money every month and paying every penny of it into the trust, which is the real owner of your mortgage. If you pay less than the whole amount, JP Morgan is now obligated to pay the trust the remainder out of its own pocket. When you fall behind, your bank falls behind, too. The only way it gets off the hook is if the house is foreclosed on and sold.

That's what this foreclosure crisis is all about: fleeing the scene of the crime. Add into the equation the fact that some of these big banks were simultaneously betting big money against these mortgages — Goldman Sachs being the prime example — and you can see that there were heavy incentives across the board to push anyone in trouble over the cliff.

Things used to be different. Asked what percentage of struggling homeowners she used to be able to save from foreclosure in the days before securitization, Charney is quick to answer. "Most of them," she says. "I seldom came across a mortgage I couldn't work out."

In Judge Soud's court, I come across a shining example of this mindless rush to foreclosure when I meet Natasha Leonard, a single mother who bought a house in 2004 for $97,500. Right after closing on the home, Leonard lost her job. But when she tried to get a modification on the loan, the bank's offer was not helpful. "They wanted me to pay $1,000," she says. Which wasn't exactly the kind of modification she was hoping for, given that her original monthly payment was $840.

"You're paying $840, you ask for a break, and they ask you to pay $1,000?" I ask.

"Right," she says.

Leonard now has a job and could make some kind of reduced payment. But instead of offering loan modification, the bank's lawyers are in their fourth year of doggedly beating her brains out over minor technicalities in the foreclosure process. That's fine by the lawyers, who are collecting big fees. And there appears to be no human being at the bank who's involved enough to issue a sane decision to end the costly battle. "If there was a real client on the other side, maybe they could work something out," says Charney, who is representing Leonard. In this lunatic bureaucratic jungle of securitized home loans issued by trans­national behemoths, the borrower-lender relationship can only go one of two ways: full payment, or total war.

The extreme randomness of the system is exemplified by the last case I see in the rocket docket. While most foreclosures are unopposed, with homeowners not even bothering to show up in court to defend themselves, a few pro se defendants — people representing themselves — occasionally trickle in. At one point during Judge Soud's proceeding, a tallish blond woman named Shawnetta Cooper walks in with a confused look on her face. A recent divorcee delinquent in her payments, she has come to court today fully expecting to be foreclosed on by Wells Fargo. She sits down and takes a quick look around at the lawyers who are here to kick her out of her home. "The land has been in my family for four generations," she tells me later. "I don't want to be the one to lose it."

Judge Soud pipes up and inquires if there's a plaintiff lawyer present; someone has to lop off this woman's head so the court can move on to the next case. But then something unexpected happens: It turns out that Kessler is supposed to be foreclosing on her today, but he doesn't have her folder. The plaintiff, technically, has forgotten to show up to court.

Just minutes before, I had watched what happens when defendants don't show up in court: kerchunk! The judge more or less automatically rules for the plaintiffs when the homeowner is a no-show. But when the plaintiff doesn't show, the judge is suddenly all mercy and forgiveness. Soud simply continues Cooper's case, telling Kessler to get his shit together and come back for another whack at her in a few weeks. Having done this, he dismisses everyone.

Stunned, Cooper wanders out of the courtroom looking like a person who has stepped up to the gallows expecting to be hanged, but has instead been handed a fruit basket and a new set of golf clubs.

I follow her out of the court, hoping to ask her about her case. But the sight of a journalist getting up to talk to a defendant in his kangaroo court clearly puts a charge into His Honor, and he immediately calls Cooper back into the conference room. Then, to the amazement of everyone present, he issues the following speech:

"This young man," he says, pointing at me, "is a reporter for Rolling Stone. It is your privilege to talk to him if you want." He pauses. "It is also your privilege to not talk to him if you want."

I stare at the judge, open-mouthed. Here's a woman who still has to come back to this guy's court to find out if she can keep her home, and the judge's admonition suggests that she may run the risk of pissing him off if she talks to a reporter. Worse, about an hour later, April Charney, the lawyer who accompanied me to court, receives an e-mail from the judge actually threatening her with contempt for bringing a stranger to his court. Noting that "we ask that anyone other than a lawyer remain in the lobby," Judge Soud admonishes Charney that "your unprofessional conduct and apparent authorization that the reporter could pursue a property owner immediately out of Chambers into the hallway for an interview, may very well be sited [sic] for possible contempt in the future."

Let's leave aside for a moment that Charney never said a word to me about speaking to Cooper. And let's overlook entirely the fact that the judge can't spell the word cited. The key here isn't this individual judge — it's the notion that these hearings are not and should not be entirely public. Quite clearly, foreclosure is meant to be neither seen nor heard.

After Soud's outburst, Cooper quietly leaves the court. Once out of sight of the judge, she shows me her file. It's not hard to find the fraud in the case. For starters, the assignment of mortgage is autographed by a notorious robo-signer — John Kennerty, who gave a deposition this summer admitting that he signed as many as 150 documents a day for Wells Fargo. In Cooper's case, the document with Kennerty's signature on it places the date on which Wells Fargo obtained the mortgage as May 5th, 2010. The trouble is, the bank bought the loan from Wachovia — a bank that went out of business in 2008. All of which is interesting, because in her file, it states that Wells Fargo sued Cooper for foreclosure on February 22nd, 2010. In other words, the bank foreclosed on Cooper three months before it obtained her mortgage from a nonexistent company.

There are other types of grift and outright theft in the file. As is typical in many foreclosure cases, Cooper is being charged by the bank for numerous attempts to serve her with papers. But a booming industry has grown up around fraudulent process servers; companies will claim they made dozens of attempts to serve homeowners, when in fact they made just one or none at all. Who's going to check? The process servers cover up the crime using the same tactic as the lenders, saying they lost the original summons. From 2000 to 2006, there was a total of 1,031 "affidavits of lost summons" here in Duval County; in the past two years, by contrast, more than 4,000 have been filed.

Cooper's file contains a total of $371 in fees for process service, including one charge of $55 for an attempt to serve process on an "unknown tenant." But Cooper's house is owner-occupied — she doesn't even have a tenant, she tells me with a shrug. If Mark Kessler had had his shit together in court today, Coop­er would not only be out on the street, she'd be paying for that attempt to serve papers to her nonexistent tenant.

Cooper's case perfectly summarizes what the foreclosure crisis is all about. Her original loan was made by Wachovia, a bank that blew itself up in 2008 speculating in the mortgage market. It was then transferred to Wells Fargo, a megabank that was handed some $50 billion in public assistance to help it acquire the corpse of Wachovia. And who else benefited from that $50 billion in bailout money? Billionaire Warren Buffett and his Berkshire Hathaway fund, which happens to be a major shareholder in Wells Fargo. It was Buffett's vice chairman, Charles Munger, who recently told America that it should "thank God" that the government bailed out banks like the one he invests in, while people who have fallen on hard times — that is, homeowners like Shawnetta Cooper — should "suck it in and cope."

Look: It's undeniable that many of the people facing foreclosure bear some responsibility for the crisis. Some borrowed beyond their means. Some even borrowed knowing they would never be able to pay off their debt, either hoping to flip their houses right away or taking on mortgages with low initial teaser rates without bothering to think of the future. The culture of take-for-yourself-now, let-someone-else-pay-later wasn't completely restricted to Wall Street. It penetrated all the way down to the individual consumer, who in some cases was a knowing accomplice in the bubble mess.

But many of these homeowners are just ordinary Joes who had no idea what they were getting into. Some were pushed into dangerous loans when they qualified for safe ones. Others were told not to worry about future jumps in interest rates because they could just refinance down the road, or discovered that the value of their homes had been overinflated by brokers looking to pad their commissions. And that's not even accounting for the fact that most of this credit wouldn't have been available in the first place without the Ponzi-like bubble scheme cooked up by Wall Street, about which the average home­owner knew nothing — hell, even the average U.S. senator didn't know about it.

At worst, these ordinary homeowners were stupid or uninformed — while the banks that lent them the money are guilty of committing a baldfaced crime on a grand scale. These banks robbed investors and conned homeowners, blew themselves up chasing the fraud, then begged the taxpayers to bail them out. And bail them out we did: We ponied up billions to help Wells Fargo buy Wachovia, paid Bank of America to buy Merrill Lynch, and watched as the Fed opened up special facilities to buy up the assets in defective mortgage trusts at inflated prices. And after all that effort by the state to buy back these phony assets so the thieves could all stay in business and keep their bonuses, what did the banks do? They put their foot on the foreclosure gas pedal and stepped up the effort to kick people out of their homes as fast as possible, before the world caught on to how these loans were made in the first place.

Why don't the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them. According to the rules of the mortgage trusts, a lender like Bank of America, which controls all the Countrywide loans, is required by law to buy back from investors every faulty loan the crooks at Countrywide ever issued. Think about what that would do to Bank of America's bottom line the next time you wonder why they're trying so hard to rush these loans into someone else's hands.

When you meet people who are losing their homes in this foreclosure crisis, they almost all have the same look of deep shame and anguish. Nowhere else on the planet is it such a crime to be down on your luck, even if you were put there by some of the world's richest banks, which continue to rake in record profits purely because they got a big fat handout from the government. That's why one banker CEO after another keeps going on TV to explain that despite their own deceptive loans and fraudulent paperwork, the real problem is these deadbeat homeowners who won't pay their f**king bills. And that's why most people in this country are so ready to buy that explanation. Because in America, it's far more shameful to owe money than it is to steal it.

The following is an article from the November 25, 2010 issue of Rolling Stone. This issue is available Friday on newsstands, as well online in Rolling Stone’s digital archive. Click here to subscribe.

www.rollingstone.com/politics/news/17390/232611?RS_show_page=0



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Matt Taibbi: Courts Helping Banks Screw Over

HomeownersRetired judges are rushing through complex cases to speed foreclosures in Florida

By Matt Taibbi
Nov 10, 2010 2:35 PM EST

The following is an article from the November 25, 2010 issue of Rolling Stone. This issue is available Friday on newsstands, as well online in Rolling Stone’s digital archive. Click here to subscribe.

The foreclosure lawyers down in Jacksonville had warned me, but I was skeptical. They told me the state of Florida had created a special super-high-speed housing court with a specific mandate to rubber-stamp the legally dicey foreclosures by corporate mortgage pushers like Deutsche Bank and JP Morgan Chase. This "rocket docket," as it is called in town, is presided over by retired judges who seem to have no clue about the insanely complex financial instruments they are ruling on — securitized mortgages and laby­rinthine derivative deals of a type that didn't even exist when most of them were active members of the bench. Their stated mission isn't to decide right and wrong, but to clear cases and blast human beings out of their homes with ultimate velocity. They certainly have no incentive to penetrate the profound criminal mysteries of the great American mortgage bubble of the 2000s, perhaps the most complex Ponzi scheme in human history — an epic mountain range of corporate fraud in which Wall Street megabanks conspired first to collect huge numbers of subprime mortgages, then to unload them on unsuspecting third parties like pensions, trade unions and insurance companies (and, ultimately, you and me, as taxpayers) in the guise of AAA-rated investments. Selling lead as gold, shit as Chanel No. 5, was the essence of the booming international fraud scheme that created most all of these now-failing home mortgages.

The Real Reason America’s Cities and Towns Are Broke

The rocket docket wasn't created to investigate any of that. It exists to launder the crime and bury the evidence by speeding thousands of fraudulent and predatory loans to the ends of their life cycles, so that the houses attached to them can be sold again with clean paperwork. The judges, in fact, openly admit that their primary mission is not justice but speed. One Jacksonville judge, the Honorable A.C. Soud, even told a local newspaper that his goal is to resolve 25 cases per hour. Given the way the system is rigged, that means His Honor could well be throwing one ass on the street every 2.4 minutes.

Exclusive Excerpt: America on Sale, From Matt Taibbi's Griftopia

Foreclosure lawyers told me one other thing about the rocket docket. The hearings, they said, aren't exactly public. "The judges might give you a hard time about watching," one lawyer warned. "They're not exactly anxious for people to know about this stuff." Inwardly, I laughed at this — it sounded like typical activist paranoia. The notion that a judge would try to prevent any citizen, much less a member of the media, from watching an open civil hearing sounded ridiculous. f**ked-up as everyone knows the state of Florida is, it couldn't be that bad. It isn't Indonesia. Right?

Well, not quite. When I went to sit in on Judge Soud's courtroom in downtown Jacksonville, I was treated to an intimate, and at times breathtaking, education in the horror of the foreclosure crisis, which is rapidly emerging as the even scarier sequel to the financial meltdown of 2008: Invasion of the Home Snatchers II. In Las Vegas, one in 25 homes is now in foreclosure. In Fort Myers, Florida, one in 35. In September, lenders nationwide took over a rec­ord 102,134 properties; that same month, more than a third of all home sales were distressed properties. All told, some 820,000 Americans have already lost their homes this year, and another 1 million currently face foreclosure.

Throughout the mounting catastrophe, however, many Americans have been slow to comprehend the true nature of the mortgage disaster. They seemed to have grasped just two things about the crisis: One, a lot of people are getting their houses foreclosed on. Two, some of the banks doing the foreclosing seem to have misplaced their paperwork.

Taibbi’s Takedown of ‘Vampire Squid’ Goldman Sachs

For most people, the former bit about homeowners not paying their d**n bills is the important part, while the latter, about the sudden and strange inability of the world's biggest and wealthiest banks to keep proper records, is incidental. Just a little office sloppiness, and who cares? Those deadbeat homeowners still owe the money, right? "They had it coming to them," is how a bartender at the Jacksonville airport put it to me.

But in reality, it's the unpaid bills that are incidental and the lost paperwork that matters. It turns out that underneath that little iceberg tip of exposed evidence lies a fraud so gigantic that it literally cannot be contemplated by our leaders, for fear of admitting that our entire financial system is corrupted to its core — with our great banks and even our government coffers backed not by real wealth but by vast landfills of deceptively generated and essentially worthless mortgage-backed assets.

You've heard of Too Big to Fail — the foreclosure crisis is Too Big for Fraud. Think of the Bernie Madoff scam, only replicated tens of thousands of times over, infecting every corner of the financial universe. The underlying crime is so pervasive, we simply can't admit to it — and so we are working feverishly to rubber-stamp the problem away, in sordid little backrooms in cities like Jacksonville, behind doors that shouldn't be, but often are, closed.

Matt Taibbi blogs on the Taibblog

And that's just the economic side of the story. The moral angle to the foreclosure crisis — and, of course, in capitalism we're not supposed to be concerned with the moral stuff, but let's mention it anyway — shows a culture that is slowly giving in to a futuristic nightmare ideology of computerized greed and unchecked financial violence. The monster in the foreclosure crisis has no face and no brain. The mortgages that are being foreclosed upon have no real owners. The lawyers bringing the cases to evict the humans have no real clients. It is complete and absolute legal and economic chaos. No single limb of this vast man-­eating thing knows what the other is doing, which makes it nearly impossible to combat — and scary as hell to watch.

What follows is an account of a single hour of Judge A.C. Soud's rocket docket in Jacksonville. Like everything else related to the modern economy, these foreclosure hearings are conducted in what is essentially a foreign language, heavy on jargon and impenetrable to the casual observer. It took days of interviews with experts before and after this hearing to make sense of this single hour of courtroom drama. And though the permutations of small-time scammery and grift in the foreclosure world are virtually endless — your average foreclosure case involves homeowners or investors being screwed at least five or six creative ways — a single hour of court and a few cases is enough to tell the main story. Because if you see one of these scams, you see them all.

It's early on a sunny Tuesday morning when I arrive at the chambers of Judge Soud, one of four rotating judges who preside over the local rocket docket. These special foreclosure courts were established in July of this year, after the state of Florida budgeted $9.6 million to create a new court with a specific mandate to clear 62 percent of the foreclosure cases that were clogging up the system. Rather than forcing active judges to hear thousands of individual cases, this strategy relies on retired judges who take turns churning through dozens of cases every morning, with little time to pay much attention to the particulars.

What passes for a foreclosure court in Jacksonville is actually a small conference room at the end of a hall on the fifth floor of the drab brick Duval County Courthouse. The space would just about fit a fridge and a pingpong table. At the head of a modest conference table this morning sits Judge Soud, a small and fussy-looking man who reminds me vaguely of the actor Ben Gazzara.

On one side of the table sits James Kowalski, a former homicide prosecutor who is now defending homeowners. A stern man with a shaved head and a laconic manner of speaking, Kowalski has helped pioneer a whole new approach to the housing mess, slowing down the mindless eviction machine by deposing the scores of "robo-signers" being hired by the banks to sign phony foreclosure affidavits by the thousands. For his work on behalf of the dispossessed, Kowalski was recently profiled in a preposterous Wall Street Journal article that blamed attorneys like him for causing the foreclosure mess with their nuisance defense claims. The headline: "Niche Lawyers Spawned Housing Fracas."

On the other side of the table are the plaintiff's attorneys, the guys who represent the banks. On this level of the game, these lawyers refer to themselves as "bench warmers" — volume stand-ins subcontracted by the big, hired-killer law firms that work for the banks. One of the bench warmers present today is Mark Kessler, who works for a number of lenders and giant "foreclosure mills," including the one run by David J. Stern, a gazillionaire attorney and all-Universe asshole who last year tried to foreclose on 70,382 homeowners. Which is a nice way to make a living, considering that Stern and his wife, Jeanine, have bought nearly $60 million in property for themselves in recent years, including a 9,273-square-foot manse in Fort Lauderdale that is part of a Ritz-Carlton complex.

Kessler is a harried, middle-aged man in glasses who spends the morning perpetually fighting to organize a towering stack of folders, each one representing a soon-to-be-homeless human being. It quickly becomes apparent that Kessler is barely acquainted with the names in the files, much less the details of each case. "A lot of these guys won't even get the folders until right before the hearing," says Kowalski.

When I arrive, Judge Soud and the lawyers are already arguing a foreclosure case; at a break in the action, I slip into the chamber with a legal-aid attorney who's accompanying me and sit down. The judge eyes me anxiously, then proceeds. He clears his throat, and then it's ready, set, fraud!

Judge Soud seems to have no clue that the files he is processing at a breakneck pace are stuffed with fraudulent claims and outright lies. "We have not encountered any fraud yet," he recently told a local newspaper. "If we encountered fraud, it would go to [the state attorney], I can tell you that." But the very first case I see in his court is riddled with fraud.

Kowalski has seen hundreds of cases like the one he's presenting this morning. It started back in 2006, when he went to Pennsylvania to conduct what he thought would be a routine deposition of an official at the lending giant GMAC. What he discovered was that the official — who had sworn to having personal knowledge of the case — was, in fact, just a "robo-signer" who had signed off on the file without knowing anything about the actual homeowner or his payment history. (Kowalski's clients, like most of the homeowners he represents, were actually making their payments on time; in this particular case, a check had been mistakenly refused by GMAC.) Following the evidence, Kowalski discovered what has turned out to be a systemwide collapse of the process for documenting mortgages in this country.

If you're foreclosing on somebody's house, you are required by law to have a collection of paperwork showing the journey of that mortgage note from the moment of issuance to the present. You should see the originating lender (a firm like Countrywide) selling the loan to the next entity in the chain (perhaps Goldman Sachs) to the next (maybe JP Morgan), with the actual note being transferred each time. But in fact, almost no bank currently foreclosing on homeowners has a reliable record of who owns the loan; in some cases, they have even intentionally shredded the actual mortgage notes. That's where the robo-signers come in. To create the appearance of paperwork where none exists, the banks drag in these pimply entry-level types — an infamous example is GMAC's notorious robo-signer Jeffrey Stephan, who appears online looking like an age-advanced photo of Beavis or Butt-Head — and get them to sign thousands of documents a month attesting to the banks' proper ownership of the mortgages.

This isn't some rare goof-up by a low-level cubicle slave: Virtually every case of foreclosure in this country involves some form of screwed-up paperwork. "I would say it's pretty close to 100 percent," says Kowalski. An attorney for Jacksonville Area Legal Aid tells me that out of the hundreds of cases she has handled, fewer than five involved no phony paperwork. "The fraud is the norm," she says.

Kowalski's current case before Judge Soud is a perfect example. The Jacksonville couple he represents are being sued for delinquent payments, but the case against them has already been dismissed once before. The first time around, the plaintiff, Bank of New York Mellon, wrote in Paragraph 8 that "plaintiff owns and holds the note" on the house belonging to the couple. But in Paragraph 3 of the same complaint, the bank reported that the note was "lost or destroyed," while in Paragraph 4 it attests that "plaintiff cannot reasonably obtain possession of the promissory note because its whereabouts cannot be determined."

The bank, in other words, tried to claim on paper, in court, that it both lost the note and had it, at the same time. Moreover, it claimed that it had included a copy of the note in the file, which it did — the only problem being that the note (a) was not properly endorsed, and (b) was payable not to Bank of New York but to someone else, a company called Novastar.

Now, months after its first pass at foreclosure was dismissed, the bank has refiled the case — and what do you know, it suddenly found the note. And this time, somehow, the note has the proper stamps. "There's a stamp that did not appear on the note that was originally filed," Kowalski tells the judge. (This business about the stamps is hilarious. "You can get them very cheap online," says Chip Parker, an attorney who defends homeowners in Jacksonville.)

The bank's new set of papers also traces ownership of the loan from the original lender, Novastar, to JP Morgan and then to Bank of New York. The bank, in other words, is trying to push through a completely new set of documents in its attempts to foreclose on Kowalski's clients.

There's only one problem: The dates of the transfers are completely f**ked. According to the documents, JP Morgan transferred the mortgage to Bank of New York on December 9th, 2008. But according to the same documents, JP Morgan didn't even receive the mortgage from Novastar until February 2nd, 2009 — two months after it had supposedly passed the note along to Bank of New York. Such rank incompetence at doctoring legal paperwork is typical of foreclosure actions, where the fraud is laid out in ink in ways that make it impossible for anyone but an overburdened, half-asleep judge to miss. "That's my point about all of this," Kowalski tells me later. "If you're going to lie to me, at least lie well."

The dates aren't the only thing screwy about the new documents submitted by Bank of New York. Having failed in its earlier attempt to claim that it actually had the mortgage note, the bank now tries an all-of-the-above tactic. "Plaintiff owns and holds the note," it claims, "or is a person entitled to enforce the note."

Soud sighs. For Kessler, the plaintiff's lawyer, to come before him with such sloppy documents and make this preposterous argument — that his client either is or is not the note-holder — well, that puts His Honor in a tough spot. The entire concept is a legal absurdity, and he can't sign off on it. With an expression of something very like regret, the judge tells Kessler, "I'm going to have to go ahead and accept [Kowalski's] argument."

Now, one might think that after a bank makes multiple attempts to push phony documents through a courtroom, a judge might be pissed off enough to simply rule against that plaintiff for good. As I witness in court all morning, the defense never gets more than one chance to screw up. But the banks get to keep filing their foreclosures over and over again, no matter how atrocious and deceitful their paperwork is.

Thus, when Soud tells Kessler that he's dismissing the case, he hastens to add: "Of course, I'm not going to dismiss with prejudice." With an emphasis on the words "of course."

Instead, Soud gives Kessler 25 days to come up with better paperwork. Kowalski fully expects the bank to come back with new documents telling a whole new story of the note's ownership. "What they're going to do, I would predict, is produce a note and say Bank of New York is not the original note-holder, but merely the servicer," he says.

This is the dirty secret of the rocket docket: The whole system is set up to enable lenders to commit fraud over and over again, until they figure out a way to reduce the stink enough so some judge like Soud can sign off on the scam. "If the court finds for the defendant, the plaintiffs just refile," says Parker, the local attorney. "The only way for the caseload to get reduced is to give it to the plaintiff. The entire process is designed with that result in mind."

Now all of this — the obviously cooked-up documents, the magically appearing stamp and the rest of it — may just seem like nothing more than sloppy paperwork. After all, what does it matter if the bank has lost a few forms or mixed up the dates? The homeowners still owe what they owe, and the deadbeats have no right to keep living in a house they haven't paid for.

But what's going on at the Jacksonville rocket docket, and in foreclosure courts all across the country, has nothing to do with sloppiness. All this phony paperwork was actually an essential part of the mortgage bubble, an integral element of what has enabled the nation's biggest lenders to pass off all that subprime lead as AAA gold.

In the old days, when you took out a mortgage, it was probably through a local bank or a credit union, and whoever gave you your loan held on to it for life. If you lost your job or got too sick to work and suddenly had trouble making your payments, you could call a human being and work things out. It was in the banker's interest, as well as yours, to make a modified payment schedule. From his point of view, it was better that you pay something than nothing at all.

But that all changed about a decade ago, thanks to the invention of new financial instruments that magically turned all these mortgages into high-grade investments. Now when you took out a mortgage, your original lender — which might well have been a big mortgage mill like Countrywide or New Century — immediately sold off your loan to big banks like Deutsche and Goldman and JP Morgan. The banks then dumped hundreds or thousands of home loans at a time into tax-exempt real estate trusts, where the loans were diced up into securities, examined and graded by the ratings agencies, and sold off to big pension funds and other institutional suckers.

Even at this stage of the game, the banks generally knew that the loans they were buying and reselling to investors were shady. A company called Clayton Holdings, which analyzed nearly 1 million loans being prepared for sale in 2006 and 2007 by 23 banks, found that nearly half of the mortgages failed to meet the underwriting standards being promised to investors. Citi­group, for instance, had 29 percent of its loans come up short, but it still sold a third of those mortgages to investors. Goldman Sachs had 19 percent of its mortgages flunk the test, yet it knowingly hawked 34 percent of the risky deals to investors.

D. Keith Johnson, the head of Clayton Holdings, was so alarmed by the findings that he went to officials at three of the main ratings agencies — Moody's, Standard and Poor's, and Fitch's — and tried to get them to properly evaluate the loans. "Wouldn't this information be great for you to have as you assign risk levels?" he asked them. (Translation: Don't you ratings agencies want to know that half these loans are crap before you give them a thumbs-up?) But all three agencies rejected his advice, fearing they would lose business if they adopted tougher standards. In the end, the agencies gave large chunks of these mortgage-backed securities AAA ratings — which means "credit risk almost zero."

Since these mortgage-backed securities paid much higher returns than other AAA investments like treasury notes or corporate bonds, the banks had no trouble attracting investors, foreign and domestic, from pension funds to insurance companies to trade unions. The demand was so great, in fact, that they often sold mortgages they didn't even have yet, prompting big warehouse lenders like Countrywide and New Century to rush out into the world to find more warm bodies to lend to.

In their extreme haste to get thousands and thousands of mortgages they could resell to the banks, the lenders committed an astonishing variety of fraud, from falsifying income statements to making grossly inflated appraisals to misrepresenting properties to home buyers. Most crucially, they gave tons and tons of credit to people who probably didn't deserve it, and why not? These fly-by-night mortgage companies weren't going to hold on to these loans, not even for 10 minutes. They were issuing this credit specifically to sell the loans off to the big banks right away, in furtherance of the larger scheme to dump fraudulent AAA-rated mortgage-backed securities on investors. If you had a pulse, they had a house to sell you.

As bad as Countrywide and all those lenders were, the banks that had sent them out to collect these crap loans were a hundred times worse. To sell the loans, the banks often dumped them into big tax-exempt buckets called REMICs, or Real Estate Mortgage Investment Conduits. Each one of these Enron-ish, offshore-like real estate trusts spelled out exactly what kinds of loans were supposed to be in the pool, when they were to be collected, and how they were to be managed. In order to both preserve their tax-exempt status and deserve their AAA ratings, each of the loans in the pool had to have certain characteristics. The loans couldn't already be in default or foreclosure at the time they were sold to investors. If they were advertised as nice, safe, fixed-rate mortgages, they couldn't turn out to be high-interest junk loans. And, on the most basic level, the loans had to actually exist. In other words, if the trust stipulated that all the loans had to be collected by August 2005, the bank couldn't still be sticking in mortgages months later.

Yet that's exactly what the banks did. In one case handled by Jacksonville Area Legal Aid, a homeowner refinanced her house in 2005 but almost immediately got into trouble, going into default in December of that year. Yet somehow, this woman's loan was placed into a trust called Home Equity Loan Trust Series AE 2005-HE5 in January 2006 — five months after the deadline for that particular trust. The loan was not only late, it was already in foreclosure — which means that, by definition, whoever the investors were in AE 2005-HE5 were getting shafted.

Why does stuff like this matter? Because when the banks put these pools together, they were telling their investors that they were putting their money into tidy collections of real, performing home loans. But frequently, the loans in the trust were complete shit. Or sometimes, the banks didn't even have all the loans they said they had. But the banks sold the securities based on these pools of mortgages as AAA-rated gold anyway.

In short, all of this was a scam — and that's why so many of these mortgages lack a true paper trail. Had these transfers been done legally, the actual mortgage note and detailed information about all of these transactions would have been passed from entity to entity each time the mortgage was sold. But in actual practice, the banks were often committing securities fraud (because many of the mortgages did not match the information in the prospectuses given to investors) and tax fraud (because the way the mortgages were collected and serviced often violated the strict procedures governing such investments). Having unloaded this diseased cargo onto their unsuspecting customers, the banks had no incentive to waste money keeping "proper" documentation of all these dubious transactions.

"You've already committed fraud once," says April Charney, an attorney with Jacksonville Area Legal Aid. "What do you have to lose?"

Sitting in the rocket docket, James Kowalski considers himself lucky to have won his first motion of the morning. To get the usually intractable Judge Soud to forestall a foreclosure is considered a real victory, and I later hear Kowalski getting props and attaboys from other foreclosure lawyers. In a great deal of these cases, in fact, the homeowners would have a pretty good chance of beating the rap, at least temporarily, if only they had lawyers fighting for them in court. But most of them don't. In fact, more than 90 percent of the cases that go through Florida foreclosure courts are unopposed. Either homeowners don't know they can fight their foreclosures, or they simply can't afford an attorney. These unopposed cases are the ones the banks know they'll win — which is why they don't sweat it if they take the occasional whipping.

That's why all these colorful descriptions of cases where foreclosure lawyers like Kowalski score in court are really just that — a little color. The meat of the foreclosure crisis is the unopposed cases; that's where the banks make their money. They almost always win those cases, no matter what's in the files.

This becomes evident after Kowalski leaves the room.

"Who's next?" Judge Soud says. He turns to Mark Kessler, the counsel for the big foreclosure mills. "Mark, you still got some?"

"I've got about three more, Judge," says Kessler.

Kessler then drops three greenish-brown files in front of Judge Soud, who spends no more than a minute or two glancing through each one. Then he closes the files and puts an end to the process by putting his official stamp on each foreclosure with an authoritative finality:

Kerchunk!
Kerchunk!
Kerchunk!

Each one of those kerchunks means another family on the street. There are no faces involved here, just beat-the-clock legal machinery. Watching Judge Soud plow through each foreclosure reminds me of the scene in Fargo where the villain played by Swedish character actor Peter Stormare pushes his victim's leg through a wood chipper with that trademark bored look on his face. Mechanized misery and brainless bureaucracy on the one hand, cash for the banks on the other.

What's sad is that most Americans who have an opinion about the foreclosure crisis don't give a shit about all the fraud involved. They don't care that these mortgages wouldn't have been available in the first place if the banks hadn't found a way to sell oregano as weed to pension funds and insurance companies. They don't care that the Countrywides of the world pushed borrowers who qualified for safer fixed-­income loans into far more dangerous adjustable-rate loans, because their brokers got bigger commissions for doing so. They don't care that in the rush to produce loans, people were sold houses that turned out to have flood damage or worse, and they certainly don't care that people were sold houses with inflated appraisals, which left them almost immediately underwater once housing prices started falling.

The way the banks tell it, it doesn't matter if they defrauded homeowners and investors and taxpayers alike to get these loans. All that matters is that a bunch of deadbeats aren't paying their f**king bills. "If you didn't pay your mortgage, you shouldn't be in your house — period," is how Walter Todd, portfolio manager at Greenwood Capital Associates, puts it. "People are getting upset about something that's just procedural."

Jamie Dimon, the CEO of JP Morgan, is even more succinct in dismissing the struggling homeowners that he and the other megabanks scammed before tossing out into the street. "We're not evicting people who deserve to stay in their house," Dimon says.

There are two things wrong with this argument. (Well, more than two, actually, but let's just stick to the two big ones.)

The first reason is: It simply isn't true. Many people who are being foreclosed on have actually paid their bills and followed all the instructions laid down by their banks. In some cases, a homeowner contacts the bank to say that he's having trouble paying his bill, and the bank offers him loan modification. But the bank tells him that in order to qualify for modification, he must first be delinquent on his mortgage. "They actually tell people to stop paying their bills for three months," says Parker.

The authorization gets recorded in what's known as the bank's "contact data­base," which records every phone call or other communication with a home­owner. But no mention of it is entered into the bank's "number history," which records only the payment record. When the number history notes that the home­owner has missed three payments in a row, it has no way of knowing that the homeowner was given permission to stop making payments. "One computer generates a default letter," says Kowalski. "Another computer contacts the credit bureaus." At no time is there a human being looking at the entire picture.

Which means that homeowners can be foreclosed on for all sorts of faulty reasons: misplaced checks, address errors, you name it. This inability of one limb of the foreclosure beast to know what the other limb is doing is responsible for many of the horrific stories befalling homeowners across the country. Patti Parker, a local attorney in Jacksonville, tells of a woman whose home was seized by Deutsche Bank two days before Christmas. Months later, Deutsche came back and admitted that they had made a mistake: They had repossessed the wrong property. In another case that made headlines in Orlando, an agent for JP Morgan mistakenly broke into a woman's house that wasn't even in foreclosure and tried to change the locks. Terrified, the woman locked herself in her bathroom and called 911. But in a profound expression of the state's reflexive willingness to side with the bad guys, the police made no arrest in the case. Breaking and entering is not a crime, apparently, when it's authorized by a bank.

The second reason the whole they still owe the f**king money thing is bogus has to do with the changed incentives in the mortgage game. In many cases, banks like JP Morgan are merely the servicers of all these home loans, charged with collecting your money every month and paying every penny of it into the trust, which is the real owner of your mortgage. If you pay less than the whole amount, JP Morgan is now obligated to pay the trust the remainder out of its own pocket. When you fall behind, your bank falls behind, too. The only way it gets off the hook is if the house is foreclosed on and sold.

That's what this foreclosure crisis is all about: fleeing the scene of the crime. Add into the equation the fact that some of these big banks were simultaneously betting big money against these mortgages — Goldman Sachs being the prime example — and you can see that there were heavy incentives across the board to push anyone in trouble over the cliff.

Things used to be different. Asked what percentage of struggling homeowners she used to be able to save from foreclosure in the days before securitization, Charney is quick to answer. "Most of them," she says. "I seldom came across a mortgage I couldn't work out."

In Judge Soud's court, I come across a shining example of this mindless rush to foreclosure when I meet Natasha Leonard, a single mother who bought a house in 2004 for $97,500. Right after closing on the home, Leonard lost her job. But when she tried to get a modification on the loan, the bank's offer was not helpful. "They wanted me to pay $1,000," she says. Which wasn't exactly the kind of modification she was hoping for, given that her original monthly payment was $840.

"You're paying $840, you ask for a break, and they ask you to pay $1,000?" I ask.

"Right," she says.

Leonard now has a job and could make some kind of reduced payment. But instead of offering loan modification, the bank's lawyers are in their fourth year of doggedly beating her brains out over minor technicalities in the foreclosure process. That's fine by the lawyers, who are collecting big fees. And there appears to be no human being at the bank who's involved enough to issue a sane decision to end the costly battle. "If there was a real client on the other side, maybe they could work something out," says Charney, who is representing Leonard. In this lunatic bureaucratic jungle of securitized home loans issued by trans­national behemoths, the borrower-lender relationship can only go one of two ways: full payment, or total war.

The extreme randomness of the system is exemplified by the last case I see in the rocket docket. While most foreclosures are unopposed, with homeowners not even bothering to show up in court to defend themselves, a few pro se defendants — people representing themselves — occasionally trickle in. At one point during Judge Soud's proceeding, a tallish blond woman named Shawnetta Cooper walks in with a confused look on her face. A recent divorcee delinquent in her payments, she has come to court today fully expecting to be foreclosed on by Wells Fargo. She sits down and takes a quick look around at the lawyers who are here to kick her out of her home. "The land has been in my family for four generations," she tells me later. "I don't want to be the one to lose it."

Judge Soud pipes up and inquires if there's a plaintiff lawyer present; someone has to lop off this woman's head so the court can move on to the next case. But then something unexpected happens: It turns out that Kessler is supposed to be foreclosing on her today, but he doesn't have her folder. The plaintiff, technically, has forgotten to show up to court.

Just minutes before, I had watched what happens when defendants don't show up in court: kerchunk! The judge more or less automatically rules for the plaintiffs when the homeowner is a no-show. But when the plaintiff doesn't show, the judge is suddenly all mercy and forgiveness. Soud simply continues Cooper's case, telling Kessler to get his shit together and come back for another whack at her in a few weeks. Having done this, he dismisses everyone.

Stunned, Cooper wanders out of the courtroom looking like a person who has stepped up to the gallows expecting to be hanged, but has instead been handed a fruit basket and a new set of golf clubs.

I follow her out of the court, hoping to ask her about her case. But the sight of a journalist getting up to talk to a defendant in his kangaroo court clearly puts a charge into His Honor, and he immediately calls Cooper back into the conference room. Then, to the amazement of everyone present, he issues the following speech:

"This young man," he says, pointing at me, "is a reporter for Rolling Stone. It is your privilege to talk to him if you want." He pauses. "It is also your privilege to not talk to him if you want."

I stare at the judge, open-mouthed. Here's a woman who still has to come back to this guy's court to find out if she can keep her home, and the judge's admonition suggests that she may run the risk of pissing him off if she talks to a reporter. Worse, about an hour later, April Charney, the lawyer who accompanied me to court, receives an e-mail from the judge actually threatening her with contempt for bringing a stranger to his court. Noting that "we ask that anyone other than a lawyer remain in the lobby," Judge Soud admonishes Charney that "your unprofessional conduct and apparent authorization that the reporter could pursue a property owner immediately out of Chambers into the hallway for an interview, may very well be sited [sic] for possible contempt in the future."

Let's leave aside for a moment that Charney never said a word to me about speaking to Cooper. And let's overlook entirely the fact that the judge can't spell the word cited. The key here isn't this individual judge — it's the notion that these hearings are not and should not be entirely public. Quite clearly, foreclosure is meant to be neither seen nor heard.

After Soud's outburst, Cooper quietly leaves the court. Once out of sight of the judge, she shows me her file. It's not hard to find the fraud in the case. For starters, the assignment of mortgage is autographed by a notorious robo-signer — John Kennerty, who gave a deposition this summer admitting that he signed as many as 150 documents a day for Wells Fargo. In Cooper's case, the document with Kennerty's signature on it places the date on which Wells Fargo obtained the mortgage as May 5th, 2010. The trouble is, the bank bought the loan from Wachovia — a bank that went out of business in 2008. All of which is interesting, because in her file, it states that Wells Fargo sued Cooper for foreclosure on February 22nd, 2010. In other words, the bank foreclosed on Cooper three months before it obtained her mortgage from a nonexistent company.

There are other types of grift and outright theft in the file. As is typical in many foreclosure cases, Cooper is being charged by the bank for numerous attempts to serve her with papers. But a booming industry has grown up around fraudulent process servers; companies will claim they made dozens of attempts to serve homeowners, when in fact they made just one or none at all. Who's going to check? The process servers cover up the crime using the same tactic as the lenders, saying they lost the original summons. From 2000 to 2006, there was a total of 1,031 "affidavits of lost summons" here in Duval County; in the past two years, by contrast, more than 4,000 have been filed.

Cooper's file contains a total of $371 in fees for process service, including one charge of $55 for an attempt to serve process on an "unknown tenant." But Cooper's house is owner-occupied — she doesn't even have a tenant, she tells me with a shrug. If Mark Kessler had had his shit together in court today, Coop­er would not only be out on the street, she'd be paying for that attempt to serve papers to her nonexistent tenant.

Cooper's case perfectly summarizes what the foreclosure crisis is all about. Her original loan was made by Wachovia, a bank that blew itself up in 2008 speculating in the mortgage market. It was then transferred to Wells Fargo, a megabank that was handed some $50 billion in public assistance to help it acquire the corpse of Wachovia. And who else benefited from that $50 billion in bailout money? Billionaire Warren Buffett and his Berkshire Hathaway fund, which happens to be a major shareholder in Wells Fargo. It was Buffett's vice chairman, Charles Munger, who recently told America that it should "thank God" that the government bailed out banks like the one he invests in, while people who have fallen on hard times — that is, homeowners like Shawnetta Cooper — should "suck it in and cope."

Look: It's undeniable that many of the people facing foreclosure bear some responsibility for the crisis. Some borrowed beyond their means. Some even borrowed knowing they would never be able to pay off their debt, either hoping to flip their houses right away or taking on mortgages with low initial teaser rates without bothering to think of the future. The culture of take-for-yourself-now, let-someone-else-pay-later wasn't completely restricted to Wall Street. It penetrated all the way down to the individual consumer, who in some cases was a knowing accomplice in the bubble mess.

But many of these homeowners are just ordinary Joes who had no idea what they were getting into. Some were pushed into dangerous loans when they qualified for safe ones. Others were told not to worry about future jumps in interest rates because they could just refinance down the road, or discovered that the value of their homes had been overinflated by brokers looking to pad their commissions. And that's not even accounting for the fact that most of this credit wouldn't have been available in the first place without the Ponzi-like bubble scheme cooked up by Wall Street, about which the average home­owner knew nothing — hell, even the average U.S. senator didn't know about it.

At worst, these ordinary homeowners were stupid or uninformed — while the banks that lent them the money are guilty of committing a baldfaced crime on a grand scale. These banks robbed investors and conned homeowners, blew themselves up chasing the fraud, then begged the taxpayers to bail them out. And bail them out we did: We ponied up billions to help Wells Fargo buy Wachovia, paid Bank of America to buy Merrill Lynch, and watched as the Fed opened up special facilities to buy up the assets in defective mortgage trusts at inflated prices. And after all that effort by the state to buy back these phony assets so the thieves could all stay in business and keep their bonuses, what did the banks do? They put their foot on the foreclosure gas pedal and stepped up the effort to kick people out of their homes as fast as possible, before the world caught on to how these loans were made in the first place.

Why don't the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them. According to the rules of the mortgage trusts, a lender like Bank of America, which controls all the Countrywide loans, is required by law to buy back from investors every faulty loan the crooks at Countrywide ever issued. Think about what that would do to Bank of America's bottom line the next time you wonder why they're trying so hard to rush these loans into someone else's hands.

When you meet people who are losing their homes in this foreclosure crisis, they almost all have the same look of deep shame and anguish. Nowhere else on the planet is it such a crime to be down on your luck, even if you were put there by some of the world's richest banks, which continue to rake in record profits purely because they got a big fat handout from the government. That's why one banker CEO after another keeps going on TV to explain that despite their own deceptive loans and fraudulent paperwork, the real problem is these deadbeat homeowners who won't pay their f**king bills. And that's why most people in this country are so ready to buy that explanation. Because in America, it's far more shameful to owe money than it is to steal it.

The following is an article from the November 25, 2010 issue of Rolling Stone. This issue is available Friday on newsstands, as well online in Rolling Stone’s digital archive. Click here to subscribe.

www.rollingstone.com/politics/news/17390/232611?RS_show_page=0

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Why Isn't Wall Street in Jail?
Financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them

By Matt Taibbi
February 16, 2011 9:00 AM ET


Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

"Everything's f**ked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."

I put down my notebook. "Just that?"

"That's right," he said, signaling to the waitress for the check. "Everything's f**ked up, and nobody goes to jail. You can end the piece right there."

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive February 18.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

Invasion of the Home Snatchers

Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the Southern District of New York, "it's management buying its way off cheap, from the pockets of their victims."

Taibblog: Commentary on politics and the economy by Matt Taibbi

To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."

But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is f**ked up.

Just ask the people who tried to do the right thing.

Here's how regulation of Wall Street is supposed to work. To begin with, there's a semigigantic list of public and quasi-public agencies ostensibly keeping their eyes on the economy, a dense alphabet soup of banking, insurance, S&L, securities and commodities regulators like the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC) and the Commodity Futures Trading Commission (CFTC), as well as supposedly "self-regulating organizations" like the New York Stock Exchange. All of these outfits, by law, can at least begin the process of catching and investigating financial criminals, though none of them has prosecutorial power.

The major federal agency on the Wall Street beat is the Securities and Exchange Commission. The SEC watches for violations like insider trading, and also deals with so-called "disclosure violations" — i.e., making sure that all the financial information that publicly traded companies are required to make public actually jibes with reality. But the SEC doesn't have prosecutorial power either, so in practice, when it looks like someone needs to go to jail, they refer the case to the Justice Department. And since the vast majority of crimes in the financial services industry take place in Lower Manhattan, cases referred by the SEC often end up in the U.S. Attorney's Office for the Southern District of New York. Thus, the two top cops on Wall Street are generally considered to be that U.S. attorney — a job that has been held by thunderous prosecutorial personae like Robert Morgenthau and Rudy Giuliani — and the SEC's director of enforcement.

The relationship between the SEC and the DOJ is necessarily close, even symbiotic. Since financial crime-fighting requires a high degree of financial expertise — and since the typical drug-and-terrorism-obsessed FBI agent can't balance his own checkbook, let alone tell a synthetic CDO from a credit default swap — the Justice Department ends up leaning heavily on the SEC's army of 1,100 number-crunching investigators to make their cases. In theory, it's a well-oiled, tag-team affair: Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the SEC, the SEC works the case and delivers it to Justice, and Justice perp-walks the Asshole out of Nobu, into a Crown Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.

That's the way it's supposed to work. But a veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who's in office or which party's in power. To understand how the machinery functions, you have to start back at least a decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises a profound and difficult question about the very nature of our society: whether we have created a class of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are. The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this nonjailable class, expert not at administering punishment and justice, but at finding and removing criminal responsibility from the bodies of the accused.

The systematic lack of regulation has left even the country's top regulators frustrated. Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is broken when it comes to Wall Street. "I think you've got a wrong assumption — that we even have a law-enforcement agency when it comes to Wall Street," he says.

In the hierarchy of the SEC, the chief accountant plays a major role in working to pursue misleading and phony financial disclosures. Turner held the post a decade ago, when one of the most significant cases was swallowed up by the SEC bureaucracy. In the late 1990s, the agency had an open-and-shut case against the Rite Aid drugstore chain, which was using diabolical accounting tricks to cook their books. But instead of moving swiftly to crack down on such scams, the SEC shoved the case into the "deal with it later" file. "The Philadelphia office literally did nothing with the case for a year," Turner recalls. "Very much like the New York office with Madoff." The Rite Aid case dragged on for years — and by the time it was finished, similar accounting fiascoes at Enron and WorldCom had exploded into a full-blown financial crisis. The same was true for another SEC case that presaged the Enron disaster. The agency knew that appliance-maker Sunbeam was using the same kind of accounting scams to systematically hide losses from its investors. But in the end, the SEC's punishment for Sunbeam's CEO, Al "Chainsaw" Dunlap — widely regarded as one of the biggest assholes in the history of American finance — was a fine of $500,000. Dunlap's net worth at the time was an estimated $100 million. The SEC also barred Dunlap from ever running a public company again — forcing him to retire with a mere $99.5 million. Dunlap passed the time collecting royalties from his self-congratulatory memoir. Its title: Mean Business.

The pattern of inaction toward shady deals on Wall Street grew worse and worse after Turner left, with one slam-dunk case after another either languishing for years or disappearing altogether. Perhaps the most notorious example involved Gary Aguirre, an SEC investigator who was literally fired after he questioned the agency's failure to pursue an insider-trading case against John Mack, now the chairman of Morgan Stanley and one of America's most powerful bankers.

Aguirre joined the SEC in September 2004. Two days into his career as a financial investigator, he was asked to look into an insider-trading complaint against a hedge-fund megastar named Art Samberg. One day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of shares in a firm called Heller Financial. "It was as if Art Samberg woke up one morning and a voice from the heavens told him to start buying Heller," Aguirre recalls. "And he wasn't just buying shares — there were some days when he was trying to buy three times as many shares as were being traded that day." A few weeks later, Heller was bought by General Electric — and Samberg pocketed $18 million.

After some digging, Aguirre found himself focusing on one suspect as the likely source who had tipped Samberg off: John Mack, a close friend of Samberg's who had just stepped down as president of Morgan Stanley. At the time, Mack had been on Samberg's case to cut him into a deal involving a spinoff of the tech company Lucent — an investment that stood to make Mack a lot of money. "Mack is busting my chops" to give him a piece of the action, Samberg told an employee in an e-mail.

A week later, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among the investment bank's clients, as it happened, was a firm called Heller Financial. We don't know for sure what Mack learned on his Swiss trip; years later, Mack would claim that he had thrown away his notes about the meetings. But we do know that as soon as Mack returned from the trip, on a Friday, he called up his buddy Samberg. The very next morning, Mack was cut into the Lucent deal — a favor that netted him more than $10 million. And as soon as the market reopened after the weekend, Samberg started buying every Heller share in sight, right before it was snapped up by GE — a suspiciously timed move that earned him the equivalent of Derek Jeter's annual salary for just a few minutes of work.

The deal looked like a classic case of insider trading. But in the summer of 2005, when Aguirre told his boss he planned to interview Mack, things started getting weird. His boss told him the case wasn't likely to fly, explaining that Mack had "powerful political connections." (The investment banker had been a fundraising "Ranger" for George Bush in 2004, and would go on to be a key backer of Hillary Clinton in 2008.)

Aguirre also started to feel pressure from Morgan Stanley, which was in the process of trying to rehire Mack as CEO. At first, Aguirre was contacted by the bank's regulatory liaison, Eric Dinallo, a former top aide to Eliot Spitzer. But it didn't take long for Morgan Stanley to work its way up the SEC chain of command. Within three days, another of the firm's lawyers, Mary Jo White, was on the phone with the SEC's director of enforcement. In a shocking move that was later singled out by Senate investigators, the director actually appeared to reassure White, dismissing the case against Mack as "smoke" rather than "fire." White, incidentally, was herself the former U.S. attorney of the Southern District of New York — one of the top cops on Wall Street.

Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall Street executive — not handcuff the guy or impound his yacht, mind you, just talk to him. In the course of doing so, he finds out that his target's firm is being represented not only by Eliot Spitzer's former top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head to speak directly to the chief of the SEC's enforcement division — not Aguirre's boss, but his boss's boss's boss's boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director of enforcement.

Aguirre didn't stand a chance. A month after he complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued. "It all happened so fast, I needed a seat belt," recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.

Rather than going after Mack, the SEC started looking for someone else to blame for tipping off Samberg. (It was, Aguirre quips, "O.J.'s search for the real killers.") It wasn't until a year later that the agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had expired in the case.

"At best, the picture shows extraordinarily lax enforcement by the SEC," Senate investigators would later conclude. "At worse, the picture is colored with overtones of a possible cover-up."

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Episodes like this help explain why so many Wall Street executives felt emboldened to push the regulatory envelope during the mid-2000s. Over and over, even the most obvious cases of fraud and insider dealing got gummed up in the works, and high-ranking executives were almost never prosecuted for their crimes. In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year, AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to its collapse two years later, but no executives at the insurance giant were prosecuted.

All of this behavior set the stage for the crash of 2008, when Wall Street exploded in a raging Dresden of fraud and criminality. Yet the SEC and the Justice Department have shown almost no inclination to prosecute those most responsible for the catastrophe — even though they had insiders from the two firms whose implosions triggered the crisis, Lehman Brothers and AIG, who were more than willing to supply evidence against top executives.

In the case of Lehman Brothers, the SEC had a chance six months before the crash to move against Dick Fuld, a man recently named the worst CEO of all time by Portfolio magazine. A decade before the crash, a Lehman lawyer named Oliver Budde was going through the bank's proxy statements and noticed that it was using a loophole involving Restricted Stock Units to hide tens of millions of dollars of Fuld's compensation. Budde told his bosses that Lehman's use of RSUs was dicey at best, but they blew him off. "We're sorry about your concerns," they told him, "but we're doing it." Disturbed by such shady practices, the lawyer quit the firm in 2006.

Then, only a few months after Budde left Lehman, the SEC changed its rules to force companies to disclose exactly how much compensation in RSUs executives had coming to them. "The SEC was basically like, 'We're sick and tired of you people f**king around — we want a picture of what you're holding,'" Budde says. But instead of coming clean about eight separate RSUs that Fuld had hidden from investors, Lehman filed a proxy statement that was a masterpiece of cynical lawyering. On one page, a chart indicated that Fuld had been awarded $146 million in RSUs. But two pages later, a note in the fine print essentially stated that the chart did not contain the real number — which, it failed to mention, was actually $263 million more than the chart indicated. "They f**ked around even more than they did before," Budde says. (The law firm that helped craft the fine print, Simpson Thacher & Bartlett, would later receive a lucrative federal contract to serve as legal adviser to the TARP bailout.)

Budde decided to come forward. In April 2008, he wrote a detailed memo to the SEC about Lehman's history of hidden stocks. Shortly thereafter, he got a letter back that began, "Dear Sir or Madam." It was an automated e-response.

"They blew me off," Budde says.

Over the course of that summer, Budde tried to contact the SEC several more times, and was ignored each time. Finally, in the fateful week of September 15th, 2008, when Lehman Brothers cracked under the weight of its reckless bets on the subprime market and went into its final death spiral, Budde became seriously concerned. If the government tried to arrange for Lehman to be pawned off on another Wall Street firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up footing the bill for a company with hundreds of millions of dollars in concealed compensation. So Budde again called the SEC, right in the middle of the crisis. "Look," he told regulators. "I gave you huge stuff. You really want to take a look at this."

But the feds once again blew him off. A young staff attorney contacted Budde, who once more provided the SEC with copies of all his memos. He never heard from the agency again.

"This was like a mini-Madoff," Budde says. "They had six solid months of warnings. They could have done something."

Three weeks later, Budde was shocked to see Fuld testifying before the House Government Oversight Committee and whining about how poor he was. "I got no severance, no golden parachute," Fuld moaned. When Rep. Henry Waxman, the committee's chairman, mentioned that he thought Fuld had earned more than $480 million, Fuld corrected him and said he believed it was only $310 million.

The true number, Budde calculated, was $529 million. He contacted a Senate investigator to talk about how Fuld had misled Congress, but he never got any response. Meanwhile, in a demonstration of the government's priorities, the Justice Department is proceeding full force with a prosecution of retired baseball player Roger Clemens for lying to Congress about getting a shot of steroids in his ass. "At least Roger didn't screw over the world," Budde says, shaking his head.

Fuld has denied any wrongdoing, but his hidden compensation was only a ripple in Lehman's raging tsunami of misdeeds. The investment bank used an absurd accounting trick called "Repo 105" transactions to conceal $50 billion in loans on the firm's balance sheet. (That's $50 billion, not million.) But more than a year after the use of the Repo 105s came to light, there have still been no indictments in the affair. While it's possible that charges may yet be filed, there are now rumors that the SEC and the Justice Department may take no action against Lehman. If that's true, and there's no prosecution in a case where there's such overwhelming evidence — and where the company is already dead, meaning it can't dump further losses on investors or taxpayers — then it might be time to assume the game is up. Failing to prosecute Fuld and Lehman would be tantamount to the state marching into Wall Street and waving the green flag on a new stealing season.

The most amazing noncase in the entire crash — the one that truly defies the most basic notion of justice when it comes to Wall Street supervillains — is the one involving AIG and Joe Cassano, the nebbishy Patient Zero of the financial crisis. As chief of AIGFP, the firm's financial products subsidiary, Cassano repeatedly made public statements in 2007 claiming that his portfolio of mortgage derivatives would suffer "no dollar of loss" — an almost comically obvious misrepresentation. "God couldn't manage a $60 billion real estate portfolio without a single dollar of loss," says Turner, the agency's former chief accountant. "If the SEC can't make a disclosure case against AIG, then they might as well close up shop."

As in the Lehman case, federal prosecutors not only had plenty of evidence against AIG — they also had an eyewitness to Cassano's actions who was prepared to tell all. As an accountant at AIGFP, Joseph St. Denis had a number of run-ins with Cassano during the summer of 2007. At the time, Cassano had already made nearly $500 billion worth of derivative bets that would ultimately blow up, destroy the world's largest insurance company, and trigger the largest government bailout of a single company in U.S. history. He made many fatal mistakes, but chief among them was engaging in contracts that required AIG to post billions of dollars in collateral if there was any downgrade to its credit rating.

St. Denis didn't know about those clauses in Cassano's contracts, since they had been written before he joined the firm. What he did know was that Cassano freaked out when St. Denis spoke with an accountant at the parent company, which was only just finding out about the time bomb Cassano had set. After St. Denis finished a conference call with the executive, Cassano suddenly burst into the room and began screaming at him for talking to the New York office. He then announced that St. Denis had been "deliberately excluded" from any valuations of the most toxic elements of the derivatives portfolio — thus preventing the accountant from doing his job. What St. Denis represented was transparency — and the last thing Cassano needed was transparency.

Another clue that something was amiss with AIGFP's portfolio came when Goldman Sachs demanded that the firm pay billions in collateral, per the terms of Cassano's deadly contracts. Such "collateral calls" happen all the time on Wall Street, but seldom against a seemingly solvent and friendly business partner like AIG. And when they do happen, they are rarely paid without a fight. So St. Denis was shocked when AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it was still contesting the payments — an indication that something was seriously wrong at AIG. "When I found out about the collateral call, I literally had to sit down," St. Denis recalls. "I had to go home for the day."

After Cassano barred him from valuating the derivative deals, St. Denis had no choice but to resign. He got another job, and thought he was done with AIG. But a few months later, he learned that Cassano had held a conference call with investors in December 2007. During the call, AIGFP failed to disclose that it had posted $2 billion to Goldman Sachs following the collateral calls.

"Investors therefore did not know," the Financial Crisis Inquiry Commission would later conclude, "that AIG's earnings were overstated by $3.6 billion."

"I remember thinking, 'Wow, they're just not telling people,'" St. Denis says. "I knew. I had been there. I knew they'd posted collateral."

A year later, after the crash, St. Denis wrote a letter about his experiences to the House Government Oversight Committee, which was looking into the AIG collapse. He also met with investigators for the government, which was preparing a criminal case against Cassano. But the case never went to court. Last May, the Justice Department confirmed that it would not file charges against executives at AIGFP. Cassano, who has denied any wrongdoing, was reportedly told he was no longer a target.

Shortly after that, Cassano strolled into Washington to testify before the Financial Crisis Inquiry Commission. It was his first public appearance since the crash. He has not had to pay back a single cent out of the hundreds of millions of dollars he earned selling his insane pseudo-insurance policies on subprime mortgage deals. Now, out from under prosecution, he appeared before the FCIC and had the enormous balls to compliment his own business acumen, saying his atom-bomb swaps portfolio was, in retrospect, not that badly constructed. "I think the portfolios are withstanding the test of time," he said.

"They offered him an excellent opportunity to redeem himself," St. Denis jokes.

In the end, of course, it wasn't just the executives of Lehman and AIGFP who got passes. Virtually every one of the major players on Wall Street was similarly embroiled in scandal, yet their executives skated off into the sunset, uncharged and unfined. Goldman Sachs paid $550 million last year when it was caught defrauding investors with crappy mortgages, but no executive has been fined or jailed — not even Fabrice "Fabulous Fab" Tourre, Goldman's outrageous Euro-douche who gleefully e-mailed a pal about the "surreal" transactions in the middle of a meeting with the firm's victims. In a similar case, a sales executive at the German powerhouse Deutsche Bank got off on charges of insider trading; its general counsel at the time of the questionable deals, Robert Khuzami, now serves as director of enforcement for the SEC.

Another major firm, Bank of America, was caught hiding $5.8 billion in bonuses from shareholders as part of its takeover of Merrill Lynch. The SEC tried to let the bank off with a settlement of only $33 million, but Judge Jed Rakoff rejected the action as a "facade of enforcement." So the SEC quintupled the settlement — but it didn't require either Merrill or Bank of America to admit to wrongdoing. Unlike criminal trials, in which the facts of the crime are put on record for all to see, these Wall Street settlements almost never require the banks to make any factual disclosures, effectively burying the stories forever. "All this is done at the expense not only of the shareholders, but also of the truth," says Rakoff. Goldman, Deutsche, Merrill, Lehman, Bank of America ... who did we leave out? Oh, there's Citigroup, nailed for hiding some $40 billion in liabilities from investors. Last July, the SEC settled with Citi for $75 million. In a rare move, it also fined two Citi executives, former CFO Gary Crittenden and investor-relations chief Arthur Tildesley Jr. Their penalties, combined, came to a whopping $180,000.

Throughout the entire crisis, in fact, the government has taken exactly one serious swing of the bat against executives from a major bank, charging two guys from Bear Stearns with criminal fraud over a pair of toxic subprime hedge funds that blew up in 2007, destroying the company and robbing investors of $1.6 billion. Jurors had an e-mail between the defendants admitting that "there is simply no way for us to make money — ever" just three days before assuring investors that "there's no basis for thinking this is one big disaster." Yet the case still somehow ended in acquittal — and the Justice Department hasn't taken any of the big banks to court since.

All of which raises an obvious question: Why the hell not?

Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he knows the answer.

Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country's leading lawyers who represent Wall Street, as well as some of the government's top cops from both the SEC and the Justice Department.

Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it's a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. "They were chummier in that environment," says Aguirre, who plunked down $2,200 to attend the conference.

Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn't see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack — maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a partner at the prestigious firm of Davis Polk & Wardwell.

Two of the government's top cops were there as well: Preet Bharara, the U.S. attorney for the Southern District of New York, and Robert Khuzami, the SEC's current director of enforcement. Bharara had been recommended for his post by Chuck Schumer, Wall Street's favorite senator. And both he and Khuzami had served with Mary Jo White at the U.S. attorney's office, before Mary Jo went on to become a partner at Debevoise. What's more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the pivotal fraud case against Rite Aid.

"It wasn't just one rotation of the revolving door," says Aguirre. "It just kept spinning. Every single person had rotated in and out of government and private service."

The Revolving Door isn't just a footnote in financial law enforcement; over the past decade, more than a dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law firms, where partnerships are worth millions. That makes SEC officials like Paul Berger and Linda Thomsen the equivalent of college basketball stars waiting for their first NBA contract. Are you really going to give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big shot like John Mack was guilty of insider trading? "You take one of these jobs," says Turner, the former chief accountant for the SEC, "and you're fit for life."

Fit — and happy. The banter between the speakers at the New York conference says everything you need to know about the level of chumminess and mutual admiration that exists between these supposed adversaries of the justice system. At one point in the conference, Mary Jo White introduced Bharara, her old pal from the U.S. attorney's office.

"I want to first say how pleased I am to be here," Bharara responded. Then, addressing White, he added, "You've spawned all of us. It's almost 11 years ago to the day that Mary Jo White called me and asked me if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein."

Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. "I also want to take a moment to applaud the entire staff of the SEC for the really amazing things they have done over the past year," he said. "They've done a real service to the country, to the financial community, and not to mention a lot of your law practices."

Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when Khuzami, the SEC's director of enforcement, talked about a new "cooperation initiative" the agency had recently unveiled, in which executives are being offered incentives to report fraud they have witnessed or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC.

"We are going to try to get those individuals answers," Khuzami announced, as to "whether or not there is criminal interest in the case — so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client."

Aguirre, listening in the crowd, couldn't believe Khuzami's brazenness. The SEC's enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time. Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. "First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC," Aguirre says. "Then the Justice Department commits itself to pass, so that the player knows he's 'safe.' Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department."


When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement talking out loud about helping corporate defendants "get answers" regarding the status of their criminal cases, he initially doesn't believe it. Then I send him a transcript of the comment. "I am very, very surprised by Khuzami's statement, which does seem to me to be contrary to past practice — and not a good thing," the former prosecutor says.

Earlier this month, when Sen. Chuck Grassley found out about Khuzami's comments, he sent the SEC a letter noting that the agency's own enforcement manual not only prohibits such "answer getting," it even bars the SEC from giving defendants the Justice Department's phone number. "Should counsel or the individual ask which criminal authorities they should contact," the manual reads, "staff should decline to answer, unless authorized by the relevant criminal authorities." Both the SEC and the Justice Department deny there is anything improper in their new policy of cooperation. "We collaborate with the SEC, but they do not consult with us when they resolve their cases," Assistant Attorney General Lanny Breuer assured Congress in January. "They do that independently."

Around the same time that Breuer was testifying, however, a story broke that prior to the pathetically small settlement of $75 million that the SEC had arranged with Citigroup, Khuzami had ordered his staff to pursue lighter charges against the megabank's executives. According to a letter that was sent to Sen. Grassley's office, Khuzami had a "secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend" of his and "who was counsel for the company." The unsigned letter, which appears to have come from an SEC investigator on the case, prompted the inspector general to launch an investigation into the charge.

All of this paints a disturbing picture of a closed and corrupt system, a timeless circle of friends that virtually guarantees a collegial approach to the policing of high finance. Even before the corruption starts, the state is crippled by economic reality: Since law enforcement on Wall Street requires serious intellectual firepower, the banks seize a huge advantage from the start by hiring away the top talent. Budde, the former Lehman lawyer, says it's well known that all the best legal minds go to the big corporate law firms, while the "bottom 20 percent go to the SEC." Which makes it tough for the agency to track devious legal machinations, like the scheme to hide $263 million of Dick Fuld's compensation.

"It's such a mismatch, it's not even funny," Budde says.

But even beyond that, the system is skewed by the irrepressible pull of riches and power. If talent rises in the SEC or the Justice Department, it sooner or later jumps ship for those fat NBA contracts. Or, conversely, graduates of the big corporate firms take sabbaticals from their rich lifestyles to slum it in government service for a year or two. Many of those appointments are inevitably hand-picked by lifelong stooges for Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign contributions from Goldman Sachs, Morgan Stanley and other major players in the finance industry, along with their corporate lawyers.

As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign contributor. He put a Citigroup executive in charge of his economic transition team, and he just named an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff. "The betrayal that this represents by Obama to everybody is just — we're not ready to believe it," says Budde, a classmate of the president from their Columbia days. "He's really f**king us over like that? Really? That's really a JP Morgan guy, really?"

Which is not to say that the Obama era has meant an end to law enforcement. On the contrary: In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would "demean the seriousness" of the offenses.

So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It's not a crime. Prison is too harsh. Get them to say they're sorry, and move on. Oh, wait — let's not even make them say they're sorry. That's too mean; let's just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don't make them pay it out of their own pockets, and don't ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What's next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?

The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.


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Episodes like this help explain why so many Wall Street executives felt emboldened to push the regulatory envelope during the mid-2000s. Over and over, even the most obvious cases of fraud and insider dealing got gummed up in the works, and high-ranking executives were almost never prosecuted for their crimes. In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year, AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to its collapse two years later, but no executives at the insurance giant were prosecuted.

All of this behavior set the stage for the crash of 2008, when Wall Street exploded in a raging Dresden of fraud and criminality. Yet the SEC and the Justice Department have shown almost no inclination to prosecute those most responsible for the catastrophe — even though they had insiders from the two firms whose implosions triggered the crisis, Lehman Brothers and AIG, who were more than willing to supply evidence against top executives.

In the case of Lehman Brothers, the SEC had a chance six months before the crash to move against Dick Fuld, a man recently named the worst CEO of all time by Portfolio magazine. A decade before the crash, a Lehman lawyer named Oliver Budde was going through the bank's proxy statements and noticed that it was using a loophole involving Restricted Stock Units to hide tens of millions of dollars of Fuld's compensation. Budde told his bosses that Lehman's use of RSUs was dicey at best, but they blew him off. "We're sorry about your concerns," they told him, "but we're doing it." Disturbed by such shady practices, the lawyer quit the firm in 2006.

Then, only a few months after Budde left Lehman, the SEC changed its rules to force companies to disclose exactly how much compensation in RSUs executives had coming to them. "The SEC was basically like, 'We're sick and tired of you people f**king around — we want a picture of what you're holding,'" Budde says. But instead of coming clean about eight separate RSUs that Fuld had hidden from investors, Lehman filed a proxy statement that was a masterpiece of cynical lawyering. On one page, a chart indicated that Fuld had been awarded $146 million in RSUs. But two pages later, a note in the fine print essentially stated that the chart did not contain the real number — which, it failed to mention, was actually $263 million more than the chart indicated. "They f**ked around even more than they did before," Budde says. (The law firm that helped craft the fine print, Simpson Thacher & Bartlett, would later receive a lucrative federal contract to serve as legal adviser to the TARP bailout.)

Budde decided to come forward. In April 2008, he wrote a detailed memo to the SEC about Lehman's history of hidden stocks. Shortly thereafter, he got a letter back that began, "Dear Sir or Madam." It was an automated e-response.

"They blew me off," Budde says.

Over the course of that summer, Budde tried to contact the SEC several more times, and was ignored each time. Finally, in the fateful week of September 15th, 2008, when Lehman Brothers cracked under the weight of its reckless bets on the subprime market and went into its final death spiral, Budde became seriously concerned. If the government tried to arrange for Lehman to be pawned off on another Wall Street firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up footing the bill for a company with hundreds of millions of dollars in concealed compensation. So Budde again called the SEC, right in the middle of the crisis. "Look," he told regulators. "I gave you huge stuff. You really want to take a look at this."

But the feds once again blew him off. A young staff attorney contacted Budde, who once more provided the SEC with copies of all his memos. He never heard from the agency again.

"This was like a mini-Madoff," Budde says. "They had six solid months of warnings. They could have done something."

Three weeks later, Budde was shocked to see Fuld testifying before the House Government Oversight Committee and whining about how poor he was. "I got no severance, no golden parachute," Fuld moaned. When Rep. Henry Waxman, the committee's chairman, mentioned that he thought Fuld had earned more than $480 million, Fuld corrected him and said he believed it was only $310 million.

The true number, Budde calculated, was $529 million. He contacted a Senate investigator to talk about how Fuld had misled Congress, but he never got any response. Meanwhile, in a demonstration of the government's priorities, the Justice Department is proceeding full force with a prosecution of retired baseball player Roger Clemens for lying to Congress about getting a shot of steroids in his ass. "At least Roger didn't screw over the world," Budde says, shaking his head.

Fuld has denied any wrongdoing, but his hidden compensation was only a ripple in Lehman's raging tsunami of misdeeds. The investment bank used an absurd accounting trick called "Repo 105" transactions to conceal $50 billion in loans on the firm's balance sheet. (That's $50 billion, not million.) But more than a year after the use of the Repo 105s came to light, there have still been no indictments in the affair. While it's possible that charges may yet be filed, there are now rumors that the SEC and the Justice Department may take no action against Lehman. If that's true, and there's no prosecution in a case where there's such overwhelming evidence — and where the company is already dead, meaning it can't dump further losses on investors or taxpayers — then it might be time to assume the game is up. Failing to prosecute Fuld and Lehman would be tantamount to the state marching into Wall Street and waving the green flag on a new stealing season.

The most amazing noncase in the entire crash — the one that truly defies the most basic notion of justice when it comes to Wall Street supervillains — is the one involving AIG and Joe Cassano, the nebbishy Patient Zero of the financial crisis. As chief of AIGFP, the firm's financial products subsidiary, Cassano repeatedly made public statements in 2007 claiming that his portfolio of mortgage derivatives would suffer "no dollar of loss" — an almost comically obvious misrepresentation. "God couldn't manage a $60 billion real estate portfolio without a single dollar of loss," says Turner, the agency's former chief accountant. "If the SEC can't make a disclosure case against AIG, then they might as well close up shop."

As in the Lehman case, federal prosecutors not only had plenty of evidence against AIG — they also had an eyewitness to Cassano's actions who was prepared to tell all. As an accountant at AIGFP, Joseph St. Denis had a number of run-ins with Cassano during the summer of 2007. At the time, Cassano had already made nearly $500 billion worth of derivative bets that would ultimately blow up, destroy the world's largest insurance company, and trigger the largest government bailout of a single company in U.S. history. He made many fatal mistakes, but chief among them was engaging in contracts that required AIG to post billions of dollars in collateral if there was any downgrade to its credit rating.

St. Denis didn't know about those clauses in Cassano's contracts, since they had been written before he joined the firm. What he did know was that Cassano freaked out when St. Denis spoke with an accountant at the parent company, which was only just finding out about the time bomb Cassano had set. After St. Denis finished a conference call with the executive, Cassano suddenly burst into the room and began screaming at him for talking to the New York office. He then announced that St. Denis had been "deliberately excluded" from any valuations of the most toxic elements of the derivatives portfolio — thus preventing the accountant from doing his job. What St. Denis represented was transparency — and the last thing Cassano needed was transparency.

Another clue that something was amiss with AIGFP's portfolio came when Goldman Sachs demanded that the firm pay billions in collateral, per the terms of Cassano's deadly contracts. Such "collateral calls" happen all the time on Wall Street, but seldom against a seemingly solvent and friendly business partner like AIG. And when they do happen, they are rarely paid without a fight. So St. Denis was shocked when AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it was still contesting the payments — an indication that something was seriously wrong at AIG. "When I found out about the collateral call, I literally had to sit down," St. Denis recalls. "I had to go home for the day."

After Cassano barred him from valuating the derivative deals, St. Denis had no choice but to resign. He got another job, and thought he was done with AIG. But a few months later, he learned that Cassano had held a conference call with investors in December 2007. During the call, AIGFP failed to disclose that it had posted $2 billion to Goldman Sachs following the collateral calls.

"Investors therefore did not know," the Financial Crisis Inquiry Commission would later conclude, "that AIG's earnings were overstated by $3.6 billion."

"I remember thinking, 'Wow, they're just not telling people,'" St. Denis says. "I knew. I had been there. I knew they'd posted collateral."

A year later, after the crash, St. Denis wrote a letter about his experiences to the House Government Oversight Committee, which was looking into the AIG collapse. He also met with investigators for the government, which was preparing a criminal case against Cassano. But the case never went to court. Last May, the Justice Department confirmed that it would not file charges against executives at AIGFP. Cassano, who has denied any wrongdoing, was reportedly told he was no longer a target.

Shortly after that, Cassano strolled into Washington to testify before the Financial Crisis Inquiry Commission. It was his first public appearance since the crash. He has not had to pay back a single cent out of the hundreds of millions of dollars he earned selling his insane pseudo-insurance policies on subprime mortgage deals. Now, out from under prosecution, he appeared before the FCIC and had the enormous balls to compliment his own business acumen, saying his atom-bomb swaps portfolio was, in retrospect, not that badly constructed. "I think the portfolios are withstanding the test of time," he said.

"They offered him an excellent opportunity to redeem himself," St. Denis jokes.

In the end, of course, it wasn't just the executives of Lehman and AIGFP who got passes. Virtually every one of the major players on Wall Street was similarly embroiled in scandal, yet their executives skated off into the sunset, uncharged and unfined. Goldman Sachs paid $550 million last year when it was caught defrauding investors with crappy mortgages, but no executive has been fined or jailed — not even Fabrice "Fabulous Fab" Tourre, Goldman's outrageous Euro-douche who gleefully e-mailed a pal about the "surreal" transactions in the middle of a meeting with the firm's victims. In a similar case, a sales executive at the German powerhouse Deutsche Bank got off on charges of insider trading; its general counsel at the time of the questionable deals, Robert Khuzami, now serves as director of enforcement for the SEC.

Another major firm, Bank of America, was caught hiding $5.8 billion in bonuses from shareholders as part of its takeover of Merrill Lynch. The SEC tried to let the bank off with a settlement of only $33 million, but Judge Jed Rakoff rejected the action as a "facade of enforcement." So the SEC quintupled the settlement — but it didn't require either Merrill or Bank of America to admit to wrongdoing. Unlike criminal trials, in which the facts of the crime are put on record for all to see, these Wall Street settlements almost never require the banks to make any factual disclosures, effectively burying the stories forever. "All this is done at the expense not only of the shareholders, but also of the truth," says Rakoff. Goldman, Deutsche, Merrill, Lehman, Bank of America ... who did we leave out? Oh, there's Citigroup, nailed for hiding some $40 billion in liabilities from investors. Last July, the SEC settled with Citi for $75 million. In a rare move, it also fined two Citi executives, former CFO Gary Crittenden and investor-relations chief Arthur Tildesley Jr. Their penalties, combined, came to a whopping $180,000.

Throughout the entire crisis, in fact, the government has taken exactly one serious swing of the bat against executives from a major bank, charging two guys from Bear Stearns with criminal fraud over a pair of toxic subprime hedge funds that blew up in 2007, destroying the company and robbing investors of $1.6 billion. Jurors had an e-mail between the defendants admitting that "there is simply no way for us to make money — ever" just three days before assuring investors that "there's no basis for thinking this is one big disaster." Yet the case still somehow ended in acquittal — and the Justice Department hasn't taken any of the big banks to court since.

All of which raises an obvious question: Why the hell not?

Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he knows the answer.

Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country's leading lawyers who represent Wall Street, as well as some of the government's top cops from both the SEC and the Justice Department.

Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it's a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. "They were chummier in that environment," says Aguirre, who plunked down $2,200 to attend the conference.

Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn't see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack — maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a partner at the prestigious firm of Davis Polk & Wardwell.

Two of the government's top cops were there as well: Preet Bharara, the U.S. attorney for the Southern District of New York, and Robert Khuzami, the SEC's current director of enforcement. Bharara had been recommended for his post by Chuck Schumer, Wall Street's favorite senator. And both he and Khuzami had served with Mary Jo White at the U.S. attorney's office, before Mary Jo went on to become a partner at Debevoise. What's more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the pivotal fraud case against Rite Aid.

"It wasn't just one rotation of the revolving door," says Aguirre. "It just kept spinning. Every single person had rotated in and out of government and private service."

The Revolving Door isn't just a footnote in financial law enforcement; over the past decade, more than a dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law firms, where partnerships are worth millions. That makes SEC officials like Paul Berger and Linda Thomsen the equivalent of college basketball stars waiting for their first NBA contract. Are you really going to give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big shot like John Mack was guilty of insider trading? "You take one of these jobs," says Turner, the former chief accountant for the SEC, "and you're fit for life."

Fit — and happy. The banter between the speakers at the New York conference says everything you need to know about the level of chumminess and mutual admiration that exists between these supposed adversaries of the justice system. At one point in the conference, Mary Jo White introduced Bharara, her old pal from the U.S. attorney's office.

"I want to first say how pleased I am to be here," Bharara responded. Then, addressing White, he added, "You've spawned all of us. It's almost 11 years ago to the day that Mary Jo White called me and asked me if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein."

Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. "I also want to take a moment to applaud the entire staff of the SEC for the really amazing things they have done over the past year," he said. "They've done a real service to the country, to the financial community, and not to mention a lot of your law practices."

Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when Khuzami, the SEC's director of enforcement, talked about a new "cooperation initiative" the agency had recently unveiled, in which executives are being offered incentives to report fraud they have witnessed or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC.

"We are going to try to get those individuals answers," Khuzami announced, as to "whether or not there is criminal interest in the case — so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client."

Aguirre, listening in the crowd, couldn't believe Khuzami's brazenness. The SEC's enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time. Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. "First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC," Aguirre says. "Then the Justice Department commits itself to pass, so that the player knows he's 'safe.' Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department."


When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement talking out loud about helping corporate defendants "get answers" regarding the status of their criminal cases, he initially doesn't believe it. Then I send him a transcript of the comment. "I am very, very surprised by Khuzami's statement, which does seem to me to be contrary to past practice — and not a good thing," the former prosecutor says.

Earlier this month, when Sen. Chuck Grassley found out about Khuzami's comments, he sent the SEC a letter noting that the agency's own enforcement manual not only prohibits such "answer getting," it even bars the SEC from giving defendants the Justice Department's phone number. "Should counsel or the individual ask which criminal authorities they should contact," the manual reads, "staff should decline to answer, unless authorized by the relevant criminal authorities." Both the SEC and the Justice Department deny there is anything improper in their new policy of cooperation. "We collaborate with the SEC, but they do not consult with us when they resolve their cases," Assistant Attorney General Lanny Breuer assured Congress in January. "They do that independently."

Around the same time that Breuer was testifying, however, a story broke that prior to the pathetically small settlement of $75 million that the SEC had arranged with Citigroup, Khuzami had ordered his staff to pursue lighter charges against the megabank's executives. According to a letter that was sent to Sen. Grassley's office, Khuzami had a "secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend" of his and "who was counsel for the company." The unsigned letter, which appears to have come from an SEC investigator on the case, prompted the inspector general to launch an investigation into the charge.

All of this paints a disturbing picture of a closed and corrupt system, a timeless circle of friends that virtually guarantees a collegial approach to the policing of high finance. Even before the corruption starts, the state is crippled by economic reality: Since law enforcement on Wall Street requires serious intellectual firepower, the banks seize a huge advantage from the start by hiring away the top talent. Budde, the former Lehman lawyer, says it's well known that all the best legal minds go to the big corporate law firms, while the "bottom 20 percent go to the SEC." Which makes it tough for the agency to track devious legal machinations, like the scheme to hide $263 million of Dick Fuld's compensation.

"It's such a mismatch, it's not even funny," Budde says.

But even beyond that, the system is skewed by the irrepressible pull of riches and power. If talent rises in the SEC or the Justice Department, it sooner or later jumps ship for those fat NBA contracts. Or, conversely, graduates of the big corporate firms take sabbaticals from their rich lifestyles to slum it in government service for a year or two. Many of those appointments are inevitably hand-picked by lifelong stooges for Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign contributions from Goldman Sachs, Morgan Stanley and other major players in the finance industry, along with their corporate lawyers.

As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign contributor. He put a Citigroup executive in charge of his economic transition team, and he just named an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff. "The betrayal that this represents by Obama to everybody is just — we're not ready to believe it," says Budde, a classmate of the president from their Columbia days. "He's really f**king us over like that? Really? That's really a JP Morgan guy, really?"

Which is not to say that the Obama era has meant an end to law enforcement. On the contrary: In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would "demean the seriousness" of the offenses.

So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It's not a crime. Prison is too harsh. Get them to say they're sorry, and move on. Oh, wait — let's not even make them say they're sorry. That's too mean; let's just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don't make them pay it out of their own pockets, and don't ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What's next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?

The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.

www.rollingstone.com/politics/new....20110216?page=1

[sandi66]

Watch Matt Taibbi On Wall Street’s ‘naked Swindle’ Online - VideoSurf Video Search

www.videosurf.com/video/matt-taibbi-on-wall-street-s-naked-swindle-81133595



We've seen it before, but still great... Sept 30, 2010


also... some belief as to why we have yet to be paid.

Watch Msnbc Tv : Exposing Wall Street’s Banks Online - VideoSurf Video Search - February 16, 2011

www.videosurf.com/video/msnbc-tv-exposing-wall-street-s-banks-1260865766

[sandi66]

TAMING THE GREAT VAMPIRE SQUID
by Richard Day 2/27/2011 - 10:33 am

Matt Taibbi

Mr. Madoff, who is serving a 150-year sentence, seemed frail and a bit agitated compared with the stoic calm he maintained before his incarceration in 2009, perhaps burdened by sadness over the suicide of his son Mark in December…

“They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

While he acknowledged his guilt in the interview and said nothing could excuse his crimes, he focused his comments laserlike on the big investors and giant institutions he dealt with, not on the financial pain he caused thousands of his more modest investors. In an e-mail written on Jan. 13, he observed that many long-term clients made more in legitimate profits from him in the years before the fraud than they could have elsewhere. “I would have loved for them to not lose anything, but that was a risk they were well aware of by investing in the market,” he wrote.

www.nytimes.com/2011/02/16/business/madoff-prison-interview.html?_r=1

Matt Taibbi is back at it again. www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216



C covers most of the article right here: dagblog.com/reader-blogs/how-wall-street-beat-rap-9133

WHY ISN’T WALL STREET IN JAIL? Taibbi asks.

Well, I could posit a number of rhetorical questions.

I mean why is Rummy allowed to write a tome full of lies and preach about the coming caliphate?

Why does Dicky Cheney run free as the Tin Man seeking a heart and preaching foreign policy.

And why does Gonzo and Bolton and Bybee and Feith and a host of other war criminals escape even a deposition inquiring into their past felonies?

So Matt publishes another ten page essay that rocks and this time it concerns Wall Street.

Generally speaking, there is nothing new here.

The people who run our economy are selfish felons who lie, cheat and steal their way through each and every day. They cheat the government, they cheat their shareholders…hell, they cheat each other.

And rarely, oh so rarely, someone is thrown under the bus and ends up in prison for a couple of years.

It is the specifics that Taibbi is good at. He speaks with the right people.

In other words, he finds those who have been screwed over by the powers that be and they cannot wait to speak with him.

Why the people at the DOJ cannot figure out this stratagem is beyond me.

Just find people who were fired for doing the right thing; find people who are holding grudges against the powerful. Then speak with them.

They are willing to tell their stories.

They are wanting to tell their stories.

They are waiting to tell their stories.

As Matt puts it:

Just ask the people who tried to do the right thing. www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216

Most of them, of course, already told their stories. They prepared long memos sending them to SEC headquarters; sending them to DOJ contacts; sending them to the FBI.

Taibbi gives examples where the DOJ ‘had the goods’ and sat on the case for a year or longer.

And everybody knows that evidence disintegrates over time; like picked vegetables dissolving into putrid masses in some abandoned pantry. Witnesses move or even die. Bank accounts are erased as well as hard drives. Coconspirators get their stories ‘straight’.

And of course top students graduate from top universities, arrive at the SEC and find themselves making millions a few years later with the firms they were appointed to oversee.

Good to have you here Thomkins, I think you are going to like it around here.

Thanks Mr. Andrews. Oh and by the way a corner office would be just fine and dandy.

A corner office? I am not sure I quite understand….

Well there was the matter of the IPO where your company pocketed one hundred mill with you personally seeing ten points on that and then it all went up in one big puff of smoke and…..

A CORNER OFFICE IT IS. They told me you were good Thomkins, but Jesus…

These folks actually take pride in what they do. And getting away with it just increases their adrenaline high.

I mean Johnnie is pinched for mixing up the medicine in the basement and serves ten years in some private prison providing slave labor to some corporation that makes money off of him and the taxpayer.

And ABC corporation processes the numbers and figures that it can take a hit in the form of a fine for a hundred million because it made one billion from the scam that formed the basis for the indictment.

AND NOBODY FROM ABC CORPORATION ENDS UP IN JAIL.

If you are a resident of some godforsaken village in Afghanistan, you have witnessed murder and mayhem for decades. Death and disease become common place and it turns some humans into rather thick skinned personages without much humanity.

We can read articles on Wall Street graft every single day if we wish. If you look for them hard enough they abound and have abounded for decades.

This graft has become so common place that the electorate just does not give a d**n anymore.

Things do not have to be like this.

There are very few money making ventures that involve government.

We used to survive on tariffs and land. These two resources were all the Founding Fathers could rely on to keep the government afloat.

Nowadays we give away our land to rich crooks who end up paying no taxes on its bounty.

We give away our oil to companies like Exxon; and we not only do not tax Exxon, we give them hundreds of millions of dollars in order to help them steal our oil.

But the SEC and the DOJ could be real money makers.

If the staffs of these two agencies were increased a hundred fold, money would be pouring into our governmental coffers. Hundreds of billions of dollars in fines could be filling our governmental coffers even if we seem to have problems collecting taxes from these pricks.

Find the culprits and indict them and convict them and repossess all of their properties.

Sentence them to twenty years at hard labor. After five years of incarceration give them an early out with the institution of 10,000 hours of community service.

None of this will ever happen of course.

Taibbi concludes:

The mental stumbling block, for most Americans, is that financial crimes don't feel real; you don't see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They're crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let's steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They're attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone's claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?page=6

Add new comment

"And everybody knows that evidence disintegrates over time; like picked vegetables dissolving into putrid masses in some abandoned pantry."

Wonderful image. Please award yourself the line of the day for this.

P.S. Is there a coming caliphate of calimari?

by MrSmith1 2/27/2011 - 12:11 pm reply
Well thanks Smith!

I picture beckerhead picking up 1000 Arabian Nights by accident and figuring he had hit upon something!

by Richard Day 2/27/2011 - 1:55 pm (re: MrSmith1) reply
Richard, on the SEC and Madoff, Harry Markopolos was a the hedge fund trader who turned in Madoff 3-4 times over 10 years to 5 or more different offices or people in the SEC which only led to one incompetent SEC investigation around 2005 that cleared Madoff and his fund. Markopolos feared for his life as he tried to get Madoff investigated, because he knew Madoff controlled billions and that Madoff also handled money for some folks who may have been mob related, and that if caught, Madoff would go to jail for life so adding a murder charge would be no big deal if Madoff was ever brought to justice.

Markopolos, in his book, No One Would Listen, leaves no doubt the big boys on The Street knew Madoff was not up and up, but in the words of Markopolos, everyone on Wall Street skirts the edge of legality all the time so they don't throw stones from their glass houses. The book is excellent and a page turner, it is available at most public libraries. Markopolos said he found 10 'funds of funds' in Europe (hedge funds which just put money in other hedge funds) that all thought they were the only Madoff client in Europe. A head of one of those European fund of funds who invested money from France, committed suicide in 2008, R. Thierry Magon de la Villehuchet.

Markopolos worked for a fund that gave him the goal to match Madoff's fund results, which is why he got onto the Madoff thing to start with. He said the one tipoff was that Madoff in his fund reports said Madoff's option trades were orders of magnitude more than all options actually recorded for a given day in the market.

Markopolos also gave extensive testimony about the SEC before Congress when they investigated Madoff, and Markopolos pulled no punches. His general line is the SEC is primarily there to protect Wall Street from the public, and the staff of the SEC is heavy on lawyers, not accountants, and that they 'couldn't find first base' if the entire staff was put into Fenway Park. He also mentions how the SEC employees all hope to get a job on Wall Street for what, as Gov. Walker of Wisconsin says, 'real money'.

Markopolos testimony is at C-Span at link. Transcript of the testimony at link. It is definitely worth listening to this guy. Whether the SEC or the DOJ is any better at uncovering wrongdoing on Wall Street now than it has been historically is unknown to me.

In Markopolos C-SPAN testimony it is mentioned that the SEC under Bush had a hotline for Wall Streeters to call at the SEC to stop or slow an investigation, but no phone number to call to initiate one.

by NCD 2/27/2011 - 1:33 pm reply
Well I shall look for the book NCD, for sure.

If Martha Stewart were such a slam dunk for insider trading and all she did was get a tip from her stock broker (by the way what are stock brokers for anyway?), it could not be that hard to round up about a thousand traders tomorrow.

by Richard Day 2/27/2011 - 1:59 pm (re: NCD) reply
For a split second after reading the title immediately followed by the photo, I thought the vampire squid to be tamed was Matt Taibbi. SIgh.

Sometimes it seems like the most celebrated in-depth reporting serves as nothing more than chaff to draw attention away from what should be the true target.

In this case, the fundamental problem is a financial system with perverse incentives. Imposing more or newer regulations; fining companies; or metaphorically lynching people will not change that. Those may deter the suspect activiites until other people find another way or place to do the same thing all over again. What good does that do in the long run?

by EmmaZahn 2/27/2011 - 1:40 pm reply
Oh the vampire squid metaphor was created by Taibbi in an early essay. It is kind of a well known line among muckrakers.

Yeah, the system sucks.

But that does not mean that the US could not collect an extra trillion dollars from the guys who control the d**n system within a few years.

Fear would not be a bad emotion to work with in that stratsophere of corruption.

by Richard Day 2/27/2011 - 2:02 pm (re: EmmaZahn) reply
"What good does that do in the long run?"

The same could be said for everything in life. In the long run we are all dead. I for one would like my game of life to have some sense of justice.

At the absolute very least Joseph Cassano should be in jail. In my world you don't bring down the world economy without some consquences (of course I would like many more to be in jail too).

Nice to see you going strong DDay!

by Saladin 2/27/2011 - 2:40 pm (re: EmmaZahn) reply
Hey Saladin, good to see you!!!

by Richard Day 2/27/2011 - 3:04 pm (re: Saladin) reply

[sandi66]

www.selectsmart.com/DISCUSS/read.php?16,812093,812109,quote=1

MATT TAIBBI: In that particular instance, it's unbelievable that people can't connect the dots. You know, these pension funds that these state workers have - these were the people who were the victims of this mortgage-backed securities scheme. These were the places where the banks were selling these toxic sub-prime mortgages that eventually blew up. The pension funds lost all their money. Now the states have to pay these pensions and they're broke, and they're blaming the teachers, they're blaming the firemen, they're blaming the policemen, when in fact they were all defrauded by these banks on Wall Street. It's an incredible situation.


ty nalmann

[sandi66]

The S.E.C.'s Revolving Door: From Wall Street Lawyers to Wall Street Watchdogs

POSTED: March 30, 2:13 PM ET |

By Matt Taibbi

Got a quick note from a friend today, sending some happy news from the corporate non-enforcement arena. It seems that the white-shoe corporate defense firm Wilmer Cutler Pickering Hale is expecting yet another regulatory baby!

The SEC last week announced that Anne Small will serve as the SEC’s new deputy general counsel. Small worked in Wilmer Hale’s litigation department before snagging this post. She’ll be replacing Mark Cahn, who worked at – wait for it – Wilmer Hale for 20 years, until joining the SEC last March, when he stepped in to work for a fellow named Andrew Vollmer, who had served as the SEC’s Deputy General Counsel since 2006. Cahn will now be kicked upstairs into the General Counsel spot.

But guess who his predecessor Vollmer worked for? That’s right, Wilmer Hale. So a Wilmer lawyer comes in to replace a Wilmer lawyer, who replaced a Wilmer lawyer. Hence the firm’s nickname – “SEC West.”

Besides Cahn and Small, there are other ex-Wilmerites at the Commission. There’s Joseph Brenner, the chief counsel of the Enforcement Division, and Meredith Cross, who heads the Division of Corporate Finance. Both were Wilmer partners.

Of course it’s not like the traffic doesn’t go in both directions. Last year the SEC’s head of trading and markets, Daniel Gallagher, left to become a Wilmer partner. And the SEC’s former Director of Enforcement William McLucas is now the head of Wilmer’s securities department. The firm hired the head of the SEC’s Los Angeles office, Randall Lee, in 2007. And so on and so on.

Exactly how tough do you think all these ex-Wilmer lawyers will be on current Wilmer clients like Goldman, Citigroup, Morgan Stanley, General Electric, Credit Suisse, and practically every other major financial services company? The shamelessness factor is growing by the minute.

www.rollingstone.com/politics/blogs/taibblog/the-s-e-c-s-revolving-door-from-wall-street-lawyers-to-wall-street-watchdogs-20110330

[sandi66]

Why is the Fed Bailing Out Qaddafi?


POSTED: April 1, 12:23 PM ET | By Matt Taibbi

Barack Obama recently issued an executive order imposing a wave of sanctions against Libya, not only freezing Libyan assets, but barring Americans from having business dealings with Libyan banks.

So raise your hand if you knew that the United States has been extending billions of dollars in aid to Qaddafi and to the Central Bank of Libya, through a Libyan-owned subsidiary bank operating out of Bahrain. And raise your hand if you knew that, just a week or so after Obama’s executive order, the U.S. Treasury Department quietly issued an order exempting this and other Libyan-owned banks to continue operating without sanction.

I came across the curious case of the Arab Banking Corporation, better known as ABC, while researching a story about the results of the audit of the Federal Reserve. That story, which will be coming out in Rolling Stone in two weeks, will examine in detail some of the many lunacies uncovered by Senate investigators amid the recently-released list of bailout and emergency aid recipients – a list that includes many extremely shocking names, from foreign industrial competitors to hedge funds in tax-haven nations to various Wall Street figures of note (and some of their relatives). You will want to see this amazing list when it comes out, so please make sure to check the newsstands in two weeks’ time.

This list became public as a result of an amendment added to the Dodd-Frank financial reform bill that was sponsored by Senator Bernie Sanders of Vermont. The amendment forced the Federal Reserve to open its books for the first time and make public the names of those individuals and corporations who received emergency loans and bailout monies during the roughly two year period between the crash of 2008 and the passage of the Dodd-Frank bill.

As Bernie’s staff was going through this list, it found, among other things, some $26 billion in extremely cheap loans (as low as one quarter of one percent!) extended to this ABC bank over a period of years, beginning in December of 2007 and continuing through as recently as February of 2010. The senator sent a letter to Ben Bernanke over the winter demanding more information about this loan (among others) but the response he got was completely unhelpful.

When I first started working on this story, one of Sanders’s aides was careful to point out the ABC loans. Later, I took a closer look at the company and found that it was 59% owned by the Central Bank of Libya, which I found very odd, even by the generally insane standards of the bailout era. Why, I wondered, would the Federal Reserve be giving Muammar Qaddafi $26 billion in near-zero interest loans? Exactly how does that address America’s financial problems? What bailout plan could that possibly be part of?

It gets weirder from there. Sanders’s office subsequently found out that ABC is not only exempt from Obama’s sanctions, it has two functioning branches here in New York City. In a letter he sent yesterday evening to Ben Bernanke, Treasury Secretary Timothy Geithner, and Office of the Comptroller of the Currency chief John Walsh (the banking regulator with purview over the New York branches), Sanders put it this way:


Why would the U.S. government allow a bank that is predominantly owned by the Central Bank of Libya – an institution on which the U.S. has imposed strict economic sanctions – to operate two banking branches within our own borders?



Neither the Fed nor Treasury so far has offered explanations for these loans; the Treasury has so far only explained why ABC was not subject to sanctions and pointed to the March 4th order when I contacted them.

The ABC loans are just one example of the Fed’s bailout madness. Again, there are 21,000 transactions on the Fed’s list of released names, and “every one of these... is outrageous,” as one Sanders aide put it. You will be shocked, for sure, to find out who else is on that list. We’ll have a lot more on those other loans in the next issue of Rolling Stone.

www.rollingstone.com/politics/blogs/taibblog/why-is-the-fed-bailing-out-qaddafi-20110401



ty joye

[sandi66]

Taibbi on the Paul Ryan budget: "Having balls is not the same as having courage"

by Gaius Publius on 4/08/2011 05:20:00 PM

Paul Krugman has been writing about the Paul Ryan deficit reduction "plan" — for example, here and here — but I like Matt Taibbi's take. The prose is full-Taibbi, as you'll see shortly; but the analysis is also dead on.

Here's his open (my emphasis):


Paul Ryan, the Republican Party’s latest entrant in the seemingly endless series of young, prickish, over-coiffed, anal-retentive deficit Robespierres they’ve sent to the political center stage in the last decade or so, has come out with his new budget plan. All of these smug little jerks look alike to me – from Ralph Reed to Eric Cantor to Jeb Hensarling to Rand Paul and now to Ryan, they all look like overgrown kids who got nipple-twisted in the halls in high school, worked as Applebee’s shift managers in college, and are now taking revenge on the world as grownups by defunding hospice care and student loans and Sesame Street. They all look like they sleep with their ties on, and keep their feet in dress socks when doing their bi-monthly duty with their wives.

Every few years or so, the Republicans trot out one of these little whippersnappers, who offer proposals to hack away at the federal budget. Each successive whippersnapper inevitably tries, rhetorically, to out-mean the previous one, and their proposals are inevitably couched as the boldest and most ambitious deficit-reduction plans ever seen. Each time, we are told that these plans mark the end of the budgetary reign of terror long ago imposed by the entitlement system begun by FDR and furthered by LBJ.

Never mind that each time the Republicans actually come into power, federal deficit spending explodes and these whippersnappers somehow never get around to touching Social Security, Medicare or Medicaid. ... The reason for this is always the same: the Republicans, quite smartly, recognize that there is great political hay to be made in the appearance of deficit reduction, and that white middle class voters will respond with overwhelming enthusiasm to any call for reductions in the “welfare state,” a term which said voters will instantly associate with black welfare moms and Mexicans sneaking over the border to visit American emergency rooms.

As Taibbi points out, the problem is that once you start hacking at the remains of the welfare state, you start hacking at white people, especially older Republican white people. Which is why Medicare destruction is never going to happen. This is just pre-election tough talk for the cameras — and explains why they always choose telegenic "pod jobs" like Ryan (Taibbi from another context) to smear the goo. That anal-retentive Republican peas-in-a-pod look is no accident — it's the point.

Paul Ryan, like all the telegenic clones before him, is a salesman and no more, a front-runner for the eventual nominee. He's John the Baptist in a suit. Punishing Browns is the product he's hawking, the drug he's pushing. His looks and the orchestrated media praise around him are all part of an well-scripted ad campaign, and I'd bet money that millions were spent on it. I'd almost bet there was a casting call.

Rachel Maddow has been saying for a while, "It's not about the budget." How do you know? Taibbi again:

Ryan’s proposal also includes dropping the top tax rate for rich people from 35 percent to 25 percent. All by itself, that one change means that the government would be collecting over $4 trillion less over the next ten years.

Recognize that number, 25%? That's just slightly higher than the top tax rate suggested by Obama's Deficit Commission. They wanted 23%. See? Ryan looks almost generous by comparison. Taibbi's conclusion, his last two paragraphs, make an excellent bottom line. I'll tease you with just a part:

Ryan’s gambit, ultimately, is all about trying to get middle-class voters to swallow paying for tax cuts for rich people. It takes chutzpah to try such a thing
, but having a lot of balls is not the same as having courage.
Looking at politics as a series of ad campaigns — cynical, scripted, coordinated, professional, and expensive — allows you to see below the skin of the world and into its inner workings. The ad campaign is not a metaphor; it's a description

www.americablog.com/2011/04/taibbi-on-paul-ryans-budget-having.html


********************

Arab Banking Corporation - Algeria
Snapshot

Company Overview

Arab Banking Corporation�Algeria provides various banking products and services to public and private sector clients in Algeria. It offers banking accounts, including current, check book, foreign currency, CEDAC, INR, and deposit accounts, as well as security and term deposits. The company also provides short, middle, and long term financing comprising direct credit facility to finance working capital, such as overdraft facility in current account, factoring, and discounting bills; indirect credit for working capital, including letters of credit, bank guarantees, and customs guaranteed bonds; and investment credits. In addition, it offers trade finance products, such as documentary credits, remittance for collection, and bank guarantees; ATM cards; and online banking services. Further, the company provides banker�s checks, counter checks, safety boxes, money transfers, and foreign exchange; and manages the remittance and recovery of checks, drafts settlement, and recovery. It operates branches in Bir Mourad Rais, Dely Brahim, Chaabani, Amirouche, Kouba, Oran, Hassi Messaoud, Draria, Dar El Beida, Staoueli, Birkhadem, Blida, and Tizi Ouzou. The company was founded in 1998 and is headquartered in Algiers, Algeria. Arab Banking Corporation�Algeria operates as a subsidiary of Arab Banking Corporation (BSC) Bahrain.

Arab Banking Corporation�Algeria provides various banking products and services to public and private sector clients in Algeria. It offers banking accounts, including current, check book, foreign currency, CEDAC, INR, and deposit accounts, as well as security and term deposits. The company also provides short, middle, and long term financing comprising direct credit facility to finance working capital, such as overdraft facility in current account, factoring, and discounting bills; indirect credit for working capital, including letters of credit, bank guarantees, and customs guaranteed bonds; and investment credits. In addition, it offers trade finance products, such as documentary credits, remittance for collection, and bank guarantees; ATM cards; and online banking services. Further, the company provides banker�s checks, counter checks, safety boxes, money transfers, and foreign exchange; and manages the remittance and recovery of checks, drafts settlement, and recovery. It operates branches in Bir Mourad Rais, Dely Brahim, Chaabani, Amirouche, Kouba, Oran, Hassi Messaoud, Draria, Dar El Beida, Staoueli, Birkhadem, Blida, and Tizi Ouzou. The company was founded in 1998 and is headquartered in Algiers, Algeria. Arab Banking Corporation�Algeria operates as a subsidiary of Arab Banking Corporation (BSC) Bahrain.

Detailed Description
54 Avenue des Trois Freres Bouaddou

PO Box 367 Bir Mourad Rais

Algiers,

Algeria

Founded in 1998
Phone:
213 21 54 15 37


Fax:
213 21 54 16 04


www.arabbanking.com.dz
Key Executives
Mr. Ahmed Redha Kara-Terki
Chief Executive Officer
Mr. Mohamed Saleem Ashokry
Chairman and President
Mr. Hassan Ali Juma
Chief Executive of ARAB BANKING CORPORATION and President of ARAB BANKING CORPORATION
Age: 62 Mr. Brahim Kassali
Secretary
Mr. Mohamed El Amine Didi
Country Manager and Director
Compensation as of Fiscal Year 2010.

investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=48877267



KEY EXECUTIVES FOR Arab Banking Corporation - Algeria*
Name Board Relationships Title Age
Ahmed Redha Kara-Terki No Relationships Chief Executive Officer --
Mohamed Saleem Ashokry 7 Relationships Chairman and President --
Hassan Ali Juma FCMA 42 Relationships Chief Executive of ARAB BANKING CORPORATION and President of ARAB BANKING CORPORATION 62
Brahim Kassali 7 Relationships Secretary, Director and Member of Audit Committee --
Mohamed El Amine Didi 7 Relationships Country Manager and Director --
View More Key Executives

Arab Banking Corporation - Algeria Board Members*
Name Board Relationships Primary Company Age
Mohamed Saleem Ashokry 7 Relationships Arab Banking Corporation - Algeria --
Saddek Omar El Kaber 7 Relationships University of Hartford --
Brahim Kassali 7 Relationships La Compagnie Alg�rienne d'Assurance et de R�assurance --
Mohammed Hussain Layas 25 Relationships Arab Banking Corporation B.S.C. --
Souheil Badro 14 Relationships Arab Banking Corporation /(Jordan) --

View All Board Members
Arab Banking Corporation - Algeria EXECUTIVE COMMITTEES*
Committee Name Chairperson Board Relationships Members
Audit Committee Saddek Omar El Kaber 7 Relationships 3 Executives
Compensation Committee Souheil Badro 14 Relationships 2 Executives
Corporate Governance Committee Saddek Omar El Kaber 7 Relationships 3 Executives

View Committee Details
*Data is at least as current as the most recent Definitive Proxy.

investing.businessweek.com/research/stocks/private/people.asp?privcapId=48877267

[sandi66]

Matt Tiabbi "I came across the curious case of the Arab Banking Corporation, better known as ABC, while researching a story about the results of the audit of the Federal Reserve. That story, which will be coming out in Rolling Stone in two weeks, will examine in detail some of the many lunacies uncovered by Senate investigators amid the recently-released list of bailout and emergency aid recipients – a list that includes many extremely shocking names, from foreign industrial competitors to hedge funds in tax-haven nations to various Wall Street figures of note (and some of their relatives). You will want to see this amazing list when it comes out, so please make sure to check the newsstands in two weeks’ time.
This list became public as a result of an amendment added to the Dodd-Frank financial reform bill that was sponsored by Senator Bernie Sanders of Vermont. The amendment forced the Federal Reserve to open its books for the first time and make public the names of those individuals and corporations who received emergency loans and bailout monies during the roughly two year period between the crash of 2008 and the passage of the Dodd-Frank bill. "


ty Richard

**************************

Libya-Owned Arab Banking Corp. Drew at Least $5 Billion From Fed in Crisis

By Donal Griffin and Bob Ivry - Apr 1, 2011 12:46 PM ET

Arab Banking Corp., the lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the U.S. Federal Reserve in the 18 months after Lehman Brothers Holdings Inc. collapsed.

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion -- while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday. In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Fed officials say all the discount window loans made during the worst financial crisis since the 1930s have been repaid with interest.

The U.S. government has frozen assets linked to the regime of Libyan ruler Muammar Qaddafi and engaged in air strikes against his military forces, which are battling a rebel uprising in the North African country. Arab Banking got an exemption that allows the firm to continue operating while barring it from engaging in any transactions with the Libyan government, according to the U.S. Treasury Department.

Sanders Reacts
“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” Senator Bernard Sanders of Vermont, an independent who caucuses with Democrats, wrote in a letter to Fed and U.S. officials.

The letter was addressed to Fed Chairman Ben S. Bernanke, Treasury Secretary Timothy F. Geithner and John Walsh, acting comptroller of the currency. The figure refers to the aggregate amount of loans the bank received under U.S. lending programs. Arab Banking, known as ABC, owed about $4 billion to the Fed under other bailout programs in the fall of 2009, data released in December show.

“ABC has a robust balance sheet, is amply capitalized and currently maintains a comfortable liquidity position,” the company said in an e-mailed statement. “ABC currently has no outstanding loans under any Federal Reserve, or other, emergency lending program.”

Libya’s Stake
Jack Gutt, a spokesman for the Federal Reserve Bank of New York, declined to comment. Arab Banking said Dec. 2 that Libya’s stake in the Manama, Bahrain-based lender had increased to 59 percent.

“There was an uneasy detente between the United States and Libya” when the loans were made, said William Poole, senior economic adviser to Merk Investments LLC and a former president of the Federal Reserve Bank of St. Louis. “It would not happen in the morning.”

The New York branch, on Park Avenue in midtown Manhattan, deals mainly in trade finance, according to its website. David Siegel is the branch’s treasurer. The bank’s chairman is Mohammed Husain Layas, chief executive officer of the Libyan Investment Authority. The CEO is Bahrain-based Hassan Ali Juma.

“ABC’s New York branch conducts wholesale business and plays an important role in helping U.S. companies conduct business in the Middle East,” the company said in the statement. “The New York branch of ABC also participates in enhancing the liquidity of U.S. markets and virtually all of its employees are U.S. citizens.”

Company’s Loss
Arab Banking reported a loss of $880 million in 2008 as it took a $1.1 billion charge tied to structured investment vehicles and derivative products known as collateralized debt obligations. Arab Banking recovered during the next two years, posting profits totaling $265 million.

Libya previously shared the bank with the Abu Dhabi Investment Authority and the Kuwait Investment Authority, both sovereign investment funds. The Libyan Central Bank bought out the Abu Dhabi stake in 2010 and took majority control, which prompted Fitch Ratings in December to downgrade Arab Banking’s credit rating.

In March, after the U.S. froze Libya’s assets, Fitch downgraded the bank’s credit rating again, this time to “junk” status. Contracts to protect Arab Banking’s debt, which typically rise as investor confidence deteriorates, increased by 186 basis points to 500 during March. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Uncertain Outcome
“Nobody knows how the situation in Libya is going to work out finally and who will ultimately be in charge and obviously who will be running institutions like the central bank,” Philip Smith, a London-based Fitch analyst, said in a phone interview.

Under the asset freeze, the bank has been prevented from conducting transactions with the Qaddafi regime and can thus continue trading with other customers as usual, Smith said.

Arab Banking “has a policy of complying with all applicable sanctions regimes and has conducted, and will continue to conduct, its dealings in strict and total compliance with all relevant laws and regulations,” the company said in the statement.

The bank listed deposits of $17.5 billion at the end of 2010. According to a report from the Fitch Ratings firm, the Libyan Central Bank places “sizeable deposits” with the lender. Marti Adams, a spokeswoman for the Department of Treasury, declined to comment on whether Arab Banking is holding any frozen Libyan assets.

“It is today escaping the economic sanctions imposed to hobble Muammar Qaddafi’s brutal regime,” Sanders said in his letter. “Why would the U.S. government exempt the Arab Banking Corporation from economic sanctions when it is primarily owned by the Central Bank of Libya?”

www.bloomberg.com/news/2011-03-31/libya-owned-arab-banking-corp-drew-at-least-5-billion-from-fed-in-crisis.html

[sandi66]

Watch this coming Thursday….as The debt clock will tell the tale.
Watch the debt clock. In order to close the acct, it has to be EMPTY!
www.usdebtclock.org
Thurs night, they will be at ZERO. Remember that the clock is moving
at 2 bill a day.
They COULDN’T shut down before, they still had money left in the
acct!! That’s why they “extended” it to Thursday!!!
Ministers will be officially announced, RV FRI or shortly afterwards,
banks and FOREX get the memo, then cash in.

This is open and shut. Its numbers, not INTEL.

US budget ends the 15th (HUGE)

UN Basket of RV’d currencies posts the 15th

“The Arab Summit is scheduled for May 15th and it is to be hosted in
Baghdad . Iraq is spending amazing amounts of money redoing the roads
from the airport and redoing all of the 5 star hotels in order to
impress their brother nations at the summit. Also, in order to be
admitted as a full member, it has to have a trade able currency (at
least) 30 days prior to the summit itself (that would be April 15th).”

Emancipation Day – April 15th (freedom!)

In 2011, Washington , D.C. , will celebrate Emancipation Day on April
15, a day earlier than normal, since April 16 falls on a Saturday.
Emancipation Day marks the anniversary of the day that President
Lincoln signed the Compensated Emancipation Act. The Act, which was
“for the release of certain persons held to service or labor in the
District of Columbia ,” freed 3,100 slaves in the District, making DC
residents the “first freed” by the federal government. In 2005,
Emancipation Day was made an official public holiday in the District
of Columbia .

In observance of the DC holiday, Tax Day will be moved forward one
business day, this year landing it on Monday, April 18. That’s the
date your form has to be either submitted electronically or postmarked
by for your tax return to be considered timely filed by the IRS.”

***SCENARIO***
- Govt shuts down FRI, Apr 15th
- Govt is completely Bankrupt
- RV at April 14th at MIDNIGHT
- Apr 15th is EMANCIPATION Day
- CBI is CLOSED on FRI the 15th (Holy Day)
- Apr 18th the new system begins
This “theory” fits with the DEBT CLOCK.

REVALUATION OF IRAQI DINAR – April 15th or shortly afterwards.

[sandi66]

The Real Housewives of Wall Street

Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?

By Matt Taibbi
April 12, 2011 9:55 AM ET


America has two national budgets, one official, one unofficial. The official budget is public record and hotly debated: Money comes in as taxes and goes out as jet fighters, DEA agents, wheat subsidies and Medicare, plus pensions and bennies for that great untamed socialist menace called a unionized public-sector workforce that Republicans are always complaining about. According to popular legend, we're broke and in so much debt that 40 years from now our granddaughters will still be hooking on weekends to pay the medical bills of this year's retirees from the IRS, the SEC and the Department of Energy.

Why Isn't Wall Street in Jail?

Most Americans know about that budget. What they don't know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the "official" budget in size — a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

This article appears in the April 28, 2011 issue of Rolling Stone. The issue will be available on newsstands and in the online archive April 15.

Now, following an act of Congress that has forced the Fed to open its books from the bailout era, this unofficial budget is for the first time becoming at least partially a matter of public record. Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and discovering a host of outrages and lunacies in the "other" budget. It is as though someone sat down and made a list of every individual on earth who actually did not need emergency financial assistance from the United States government, and then handed them the keys to the public treasure. The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. "Our jaws are literally dropping as we're reading this," says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. "Every one of these transactions is outrageous."

Wall Street's Big Win

But if you want to get a true sense of what the "shadow budget" is all about, all you have to do is look closely at the taxpayer money handed over to a single company that goes by a seemingly innocuous name: Waterfall TALF Opportunity. At first glance, Waterfall's haul doesn't seem all that huge — just nine loans totaling some $220 million, made through a Fed bailout program. That doesn't seem like a whole lot, considering that Goldman Sachs alone received roughly $800 billion in loans from the Fed. But upon closer inspection, Waterfall TALF Opportunity boasts a couple of interesting names among its chief investors: Christy Mack and Susan Karches.

Christy is the wife of John Mack, the chairman of Morgan Stanley. Susan is the widow of Peter Karches, a close friend of the Macks who served as president of Morgan Stanley's investment-banking division. Neither woman appears to have any serious history in business, apart from a few philanthropic experiences. Yet the Federal Reserve handed them both low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtually guaranteed them millions in risk-free income.

RS Politics Daily: Political news and commentary from Rolling Stone writers and editors

The technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility. But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called "giving already stinking rich people gobs of money for no f**king reason at all." If you want to learn how the shadow budget works, follow along. This is what welfare for the rich looks like.

In August 2009, John Mack, at the time still the CEO of Morgan Stanley, made an interesting life decision. Despite the fact that he was earning the comparatively low salary of just $800,000, and had refused to give himself a bonus in the midst of the financial crisis, Mack decided to buy himself a gorgeous piece of property — a 107-year-old limestone carriage house on the Upper BeerEast Side of New York, complete with an indoor 12-car garage, that had just been sold by the prestigious Mellon family for $13.5 million. Either Mack had plenty of cash on hand to close the deal, or he got some help from his wife, Christy, who apparently bought the house with him.

The Macks make for an interesting couple. John, a Lebanese-American nicknamed "Mack the Knife" for his legendary passion for firing people, has one of the most recognizable faces on Wall Street, physically resembling a crumpled, half-burned baked potato with a pair of overturned furry horseshoes for eyebrows. Christy is thin, blond and rich — a sort of still-awake Sunny von Bulow with hobbies. Her major philanthropic passion is endowments for alternative medicine, and she has attained the level of master at Reiki, the Japanese practice of "palm healing." The only other notable fact on her public résumé is that her sister was married to Charlie Rose.

It's hard to imagine a pair of people you would less want to hand a giant welfare check to — yet that's exactly what the Fed did. Just two months before the Macks bought their fancy carriage house in Manhattan, Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.

So how did the government come to address a financial crisis caused by the collapse of a residential-mortgage bubble by giving the wives of a couple of Morgan Stanley bigwigs free money to make essentially risk-free investments in student loans and commercial real estate? The answer is: by degrees. The history of the bailout era reads like one of those awful stories about what happens when a long-dormant criminal compulsion goes unchecked. The Peeping Tom next door stares through a few bathroom windows, doesn't get caught, and decides to break in and steal a pair of panties. Next thing you know, he's upgraded to homemade dungeons, tri-state serial rampages and throwing cheerleaders into a panel truck.

It was the same with the bailouts. They started out small, with the government throwing a few hundred billion in public money to prop up genuinely insolvent firms like Bear Stearns and AIG. Then came TARP and a few other programs that were designed to stave off bank failures and dispose of the toxic mortgage-backed securities that were a root cause of the financial crisis. But before long, the Fed began buying up every distressed investment on Wall Street, even those that were in no danger of widespread defaults: commercial real estate loans, credit- card loans, auto loans, student loans, even loans backed by the Small Business Administration. What started off as a targeted effort to stop the bleeding in a few specific trouble spots became a gigantic feeding frenzy. It was "free money for shit," says Barry Ritholtz, author of Bailout Nation. "It turned into 'Give us your crap that you can't get rid of otherwise.' "

The impetus for this sudden manic expansion of the bailouts was a masterful bluff by Wall Street executives. Once the money started flowing from the Federal Reserve, the executives began moaning to their buddies at the Fed, claiming that they were suddenly afraid of investing in anything — student loans, car notes, you name it — unless their profits were guaranteed by the state. "You ever watch soccer, where the guy rolls six times to get a yellow card?" says William Black, a former federal bank regulator who teaches economics and law at the University of Missouri. "That's what this is. If you have power and connections, they will give you a freebie deal — if you're good at whining."

This is where TALF fits into the bailout picture. Created just after Barack Obama's election in November 2008, the program's ostensible justification was to spur more consumer lending, which had dried up in the midst of the financial crisis. But instead of lending directly to car buyers and credit-card holders and students — that would have been socialism! — the Fed handed out a trillion dollars to banks and hedge funds, almost interest-free. In other words, the government lent taxpayer money to the same assholes who caused the crisis, so that they could then lend that money back out on the market virtually risk-free, at an enormous profit.

Cue your Billy Mays voice, because wait, there's more! A key aspect of TALF is that the Fed doles out the money through what are known as non-recourse loans. Essentially, this means that if you don't pay the Fed back, it's no big deal. The mechanism works like this: Hedge Fund Goon borrows, say, $100 million from the Fed to buy crappy loans, which are then transferred to the Fed as collateral. If Hedge Fund Goon decides not to repay that $100 million, the Fed simply keeps its pile of crappy securities and calls everything even.

This is the deal of a lifetime. Think about it: You borrow millions, buy a bunch of crap securities and stash them on the Fed's books. If the securities lose money, you leave them on the Fed's lap and the public eats the loss. But if they make money, you take them back, cash them in and repay the funds you borrowed from the Fed. "Remember that crazy guy in the commercials who ran around covered in dollar bills shouting, 'The government is giving out free money!' " says Black. "As crazy as he was, this is making it real."

This whole setup — in which millionaires and billionaires gambled on mountains of dangerous securities, with taxpayers providing the stake and assuming almost all of the risk — is the reason that it's insanely premature for Wall Street to claim that the bailouts have actually made money for the government. We simply can't make that determination until the final bill comes in on all the dicey securities we financed during the bailout feeding frenzy.

In the case of Waterfall TALF Opportunity, here's what we know: The company was founded in June 2009 with $14.87 million of investment capital, money that likely came from Christy Mack and Susan Karches. The two Wall Street wives then used the $220 million they got from the Fed to buy up a bunch of securities, including a large pool of commercial mortgages managed by Credit Suisse, a company John Mack once headed. Those securities were valued at $253.6 million, though the Fed refuses to explain how it arrived at that estimate. And here's the kicker: Of the $220 million the two wives got from the Fed, roughly $150 million had not been paid back as of last fall — meaning that you and I are still on the hook for most of whatever the Wall Street spouses bought on their government-funded shopping spree.

The public has no way of knowing how much Christy Mack and Susan Karches earned on these transactions, because the Fed has repeatedly declined to provide any information about how it priced the individual securities bought as part of programs like TALF. In the Waterfall deal, for instance, we know the Fed pledged some $14 million against a block of securities called "Credit Suisse Commercial Mortgage Trust Series 2007-C2" — but that data is meaningless without knowing how many units were bought. It's like saying the Fed gave Waterfall $14 million to buy cars. Did Waterfall pay $5,000 per car, or $500,000? We have no idea. "There's no way of validating or invalidating the Fed's process in TALF without this pricing information," says Gary Aguirre, a former SEC official who was fired years ago after he tried to interview John Mack in an insider-trading case.

In early April, in an attempt to learn exactly how much Mack and Karches made on the TALF deals, Sen. Chuck Grassley of Iowa wrote a letter to Waterfall asking 21 detailed questions about the transactions. In addition, Sen. Sanders has personally asked Fed chief Bernanke to provide more complete information on the TALF loans given not only to Christy Mack but to gazillionaires like former Miami Dolphins owner H. Wayne Huizenga and hedge-fund shark John Paulson. But Bernanke bluntly refused to provide the information — and the Fed has similarly stonewalled other oversight agencies, including the General Accounting Office and TARP's special inspector general.

Christy Mack and Susan Karches did not respond to requests for comments for this story. But even without more information about the loans they got from the Fed, we know that TALF wasn't the only risk-free money being handed over to Wall Street. During the financial crisis, the Fed routinely made billions of dollars in "emergency" loans to big banks at near-zero interest. Many of the banks then turned around and used the money to buy Treasury bonds at higher interest rates — essentially loaning the money back to the government at an inflated rate. "People talk about how these were loans that were paid back," says a congressional aide who has studied the transactions. "But when the state is lending money at zero percent and the banks are turning around and lending that money back to the state at three percent, how is that different from just handing rich people money?"

Those kinds of deals were the essence of the bailout — and the vast mountains of near-zero government cash turned companies facing bankruptcy into monstrous profit machines. In 2008 and 2009, while Christy Mack was busy getting her little TALF loans for $220 million, her husband's bank hauled in $2 trillion in emergency Fed loans. During the same period, Goldman borrowed nearly $800 billion. Shortly afterward, the two banks reported a combined annual profit of $14.5 billion.

As crazy as it is to lend to banks at near zero percent and borrow back from them at three percent, one could at least argue that the policy may have aided American companies by providing banks more cash to lend. But how do you explain the host of other bailout transactions now being examined by Congress? Like the Fed's massive purchases of securities in foreign automakers, including BMW, Volkswagen, Honda, Mitsubishi and Nissan? Or the nearly $5 billion in cheap credit the Fed extended to Toyota and Mitsubishi? Sure, those companies have factories and dealerships in the U.S. — but does it really make sense to give them free cash at the same time taxpayers were being asked to bail out Chrysler and GM? Seems a little crazy to fund the competition of the very automakers you're trying to rescue.

And then there are the bailout deals that make no sense at all. Republicans go mad over spending on health care and school for Mexican illegals. So why aren't they flipping out over the $9.6 billion in loans the Fed made to the Central Bank of Mexico? How do we explain the $2.2 billion in loans that went to the Korea Development Bank, the biggest state bank of South Korea, whose sole purpose is to promote development in South Korea? And at a time when America is borrowing from the Middle East at interest rates of three percent, why did the Fed extend $35 billion in loans to the Arab Banking Corporation of Bahrain at interest rates as low as one quarter of one point?

Even more disturbing, the major stakeholder in the Bahrain bank is none other than the Central Bank of Libya, which owns 59 percent of the operation. In fact, the Bahrain bank just received a special exemption from the U.S. Treasury to prevent its assets from being frozen in accord with economic sanctions. That's right: Muammar Qaddafi received more than 70 loans from the Federal Reserve, along with the Real Housewives of Wall Street.

Perhaps the most irritating facet of all of these transactions is the fact that hundreds of millions of Fed dollars were given out to hedge funds and other investors with addresses in the Cayman Islands. Many of those addresses belong to companies with American affiliations — including prominent Wall Street names like Pimco, Blackstone and . . . Christy Mack. Yes, even Waterfall TALF Opportunity is an offshore company. It's one thing for the federal government to look the other way when Wall Street hotshots evade U.S. taxes by registering their investment companies in the Cayman Islands. But subsidizing tax evasion? Giving it a federal bailout? What the f**k?

As America girds itself for another round of lunatic political infighting over which barely-respirating social program or urgently necessary federal agency must have their budgets permanently sacrificed to the cause of billionaires being able to keep their third boats in the water, it's important to point out just how scarce money isn't in certain corners of the public-spending universe. In the coming months, when you watch Republican congressional stooges play out the desperate comedy of solving America's deficit problems by making fewer photocopies of proposed bills, or by taking an ax to budgetary shrubberies like NPR or the SEC, remember Christy Mack and her fancy new carriage house. There is no belt-tightening on the other side of the tracks. Just a free lunch that never ends.

www.rollingstone.com/politics/news/the-real-housewives-of-wall-street-look-whos-cashing-in-on-the-bailout-20110411?page=1



ty joye